CURRENCY SUBSTITUTION AND THE DEMAND FOR MONEY IN NIGERIA: 1980 - 2014
CURRENCY SUBSTITUTION AND THE DEMAND FOR MONEY IN NIGERIA: 1980 - 2014
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Date
2016-09
Authors
ADAMU, Maryam Bala
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Abstract
The persistent increase in demand for foreign currency, especially in recent years, exerts pressure on Nigeria's foreign exchange market. This trend is often accentuated by economic agents’ perceived loss of purchasing power and confidence in the domestic currency. Therefore, resort to holding currencies that have a relatively stable value such as the United States dollar (USD) which in turn increases the extent of currency substitution in the economy. This study investigates the existence and extent of currency substitution and how it invariably affects the demand for money in Nigeria using time series data for the 1980-2014 period. A significant contribution of this study is the consideration of the impact of crude oil price as well as the extent to which election periods contribute to currency substitution phenomenon in Nigeria. The study estimated six models that were predicated on Cuddington’s currency substitution framework. The Johansen cointegration test was employed in order to ascertain the existence of a long run relationship among the variables, and an error correction model was used to ascertain the short run adjustment dynamics. In addition to the finding that currency substitution had increased over time, albeit slowly; empirical results reveal that the expected rate of depreciation, inflation rate, election period, and crude oil price as well as foreign rate of interest determine the extent of currency substitution in Nigeria. Therefore, this study recommends that measures should be taken that will encourage and to bring back the confidence of economic agents in the domestic currency by the monetary authorities. Also, the financial system should be further deepened with liquidity to minimize vulnerability and exposure to sudden disturbances that could affect the financial system especially during election period and oil shocks.
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A THESIS SUBMITTED TO THE SCHOOL OF POSTGRADUATE STUDIES,
AHMADU BELLO UNIVERSITY, ZARIA
IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD
OF A
MASTER DEGREE IN ECONOMICS
DEPARTMENT OF ECONOMICS,
FACULTY OF SOCIAL SCIENCES
AHMADU BELLO UNIVERSITY, ZARIA
NIGERIA
Keywords
CURRENCY SUBSTITUTION,, DEMAND FOR MONEY,, NIGERIA, 1980 - 2014