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Monetary aggregation for a developing economy: a case study of Nigeria

Author

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  • Gebregiorgis, Bekele Sinkie
  • Handa, Jagdish

    (McGill University, Canada)

Abstract

This paper examines the appropriate formulation of the monetary aggregate for the Nigerian economy for the period 1970:1-2000:4 for the determination of real output. This examination covers simple sum, Variable Elasticity of Substitution (VES) and Divisia (DV) aggregation over currency, demand deposits and savings deposits. The user cost of liquid assets is employed in the construction of both the DV and the VES aggregates. Since our variables proved to be I(1), the Johansen cointegration and error-correction modelling technique were used. Our findings for the Nigerian economy are that currency does as well as or better than any narrow- or broad-money measure in explaining industrial production. Further, the simple sum M1 and M2 outperformed both the VES and Divisia aggregates. Therefore, monetary policy in Nigeria should focus on the supply of currency and/or of narrow money, rather than on broad money or the Divisia aggregates.

Suggested Citation

  • Gebregiorgis, Bekele Sinkie & Handa, Jagdish, 2004. "Monetary aggregation for a developing economy: a case study of Nigeria," Journal of Developing Areas, Tennessee State University, College of Business, vol. 38(2), pages 119-141, January-M.
    • Handle: RePEc:jda:journl:vol.38:year:2004:issue2:pp:119-141
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    More about this item

    Keywords

    monetary aggregates; Nigeria; developing economies; divisia aggregates.;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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