On the stability of the money multiplier in Nigeria: Co-integration analyses with regime shifts in banking system liquidity

Abstract

The study hypothesized the existence of regime shifts in the conduct of monetary policy, occasioned by changing liquidity conditions in the domestic banking system in Nigeria. Within the context of this prognosis, the study tests the stability of the money multiplier, utilizing methodological procedures that allow for the explicit consideration of regime shift bias in the specification of the model and the empirical estimation. The study found the existence of a stable long run relationship between broad money and the monetary base, confirming that the necessary condition for monetary control within a multiplier frame work is satisfied for Nigeria. Also, the spate of quantitative easing by the Central Bank of Nigeria to ameliorate adverse liquidity conditions and the lingering effects of the global financial crises occasioned a structural break in monetary policy, determined endogenously to have occurred in November 2009.

Keywords:

• money multiplier
• banks liquidity
• regime shifts

Jel Codes:

• E52
• G21
• C62

Public Interest Statement

A prerequisite for policy regimes that target the levels of monetary stocks is the ability of the monetary authority to control the quantity of money stock supplied and forecast the changes in the factors that affect the resulting money supply. The foregoing requires a long run stable relation between base money and the measure of money stock. The need then exists to empirically verify the existence of this condition to provide credence for the money targeting framework of monetary policy in Nigeria. Existing empirical research toward this end for Nigeria has been found to be weak in light of recent innovations in econometric analysis of unit root and co-integration tests. This study obviates these weaknesses and empirically validates a stable long run money multiplier relation for Nigeria. This provides the needed credibility for the monetary targeting policy regime of Central Bank of Nigeria.

Additional information

Funding

Funding. The authors declare no direct funding for this research.

Notes on contributors

K. Moses Tule

K. Moses Tule is currently the director, Monetary Policy Department, and the secretary to the Monetary Policy Committee (MPC), in the Central Bank of Nigeria. His key research interests cover monetary policy and exchange rate issues. He has authored several papers in peer-reviewed local and international journals.

O. Taiwo Ajilore

Taiwo Ajilore is a principal manager and head of the Monetary Policy Implementation Committee Office, in the Monetary Policy Department of Central Bank of Nigeria. He holds a PhD in Economics while his research interests are in the field of International Monetary Macroeconomics.