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Financial Development and the Velocity of Money in Nigeria: An Empirical Analysis

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Abstract

The paper investigates the impact of financial development on the velocity of money in Nigeria, over the time horizon 1986:1 — 2010:4. The paper confirms the existence of a unique and statistically significant relationship between velocity of money (narrow and broad) and measures of financial development. The error-correction results show that current exchange rate has statistically significant negative effect on velocity of money in Nigeria. Per capita income has statistically significant relation with velocity of money (narrow and broad), which clearly supports the quantity theory. The results show that money issuing authorities cannot obtain additional leverage by issuing more money without generating high inflationary pressure. The results also show the importance of financial sector innovations for velocity.

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  • A.E.Akinlo, 2012. "Financial Development and the Velocity of Money in Nigeria: An Empirical Analysis," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 4(2), pages 097-113, December.
  • Handle: RePEc:rfb:journl:v:04:y:2012:i:2:p:097-113
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    1. Milton Friedman, 1959. "The Demand for Money: Some Theoretical and Empirical Results," NBER Chapters,in: The Demand for Money: Some Theoretical and Empirical Results, pages 1-29 National Bureau of Economic Research, Inc.
    2. Bordo, Michael D. & Jonung, Lars, 1990. "The long-run behavior of velocity: The institutional approach revisited," Journal of Policy Modeling, Elsevier, vol. 12(2), pages 165-197.
    3. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    4. Peter N. Ireland, 1991. "Financial evolution and the long-run behavior of velocity : new evidence from U.S. regional data," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 16-26.
    5. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    6. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    7. Ndanshau, M-O-A, 1996. "The Behaviour of Income Velocity in Tanzania, 1967-1994," Papers 50, African Economic Research Consortium.
    8. Siklos, Pierre L, 1993. "Income Velocity and Institutional Change: Some New Time Series Evidence, 1870-1986," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 377-392, August.
    9. Muscatelli, Vito Antonio & Papi, Luca, 1990. "Cointegration, Financial Innovation and Modelling the Demand for Money in Italy," The Manchester School of Economic & Social Studies, University of Manchester, vol. 58(3), pages 242-259, September.
    10. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    11. Darrat, Ali F., 1985. "The demand for money in a developing economy: The case of Kenya," World Development, Elsevier, vol. 13(10-11), pages 1163-1170.
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    Cited by:

    1. Lydia Ndirangu & Esman Morekwa Nyamongo, 2015. "Financial Innovations and Their Implications for Monetary Policy in Kenya," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 24(suppl_1), pages 46-71.

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