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The Quantity Theory of Money and Its Long Run Implications: Empirical Evidence from Nigeria

  • Alimi, R. Santos

The Quantity Theory of Money (QTM) is one of the popular classical macroeconomic models that explain the relationship between the quantity of money in an economy and the level of prices of goods and services. This study investigates this relationship for Nigeria economy over the period of 1960 to 2009. To check the stationarity properties, we employed Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) test and found all the concerned variables are stationary only in the first differenced form. Using Johansen cointegration method, the empirical findings indicate that there exists long run cointegrating relationship among the concerned variables. Then applying the Granger causality test, we found a unidirectional causal relationship running from money supply to inflation which provides evidence in support for monetarist‟s view. In addition, this study does not provide evidence in supporting the well known fisher effect for Nigeria. Causality does not strictly run from inflation to interest rates as suggested by the Fisher hypothesis, instead a reversed causality between the variables is found. We finally used Wald test to verify the restrictions imposed on money aggregates and output, and we concluded and confirmed the proposition of quantity theory of money that inflation is a monetary phenomenon.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49598.

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Date of creation: Jun 2012
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Handle: RePEc:pra:mprapa:49598
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  1. repec:ebl:ecbull:v:5:y:2006:i:2:p:1-6 is not listed on IDEAS
  2. Emmanuel Anoruo, 2002. "Stability of the Nigerian M2 Money Demand Function in the SAP Period," Economics Bulletin, AccessEcon, vol. 14(3), pages 1-9.
  3. Özgür Aslan & Levent Korap, 2007. "Testing Quantity Theory of Money for the Turkish Economy," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 1(2), pages 93-109.
  4. Goodfriend, Marvin, 1997. "A framework for the analysis of moderate inflations," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 45-65, June.
  5. Moosa, Imad A., 1997. "Testing the long-run neutrality of money in a developing economy: the case of India," Journal of Development Economics, Elsevier, vol. 53(1), pages 139-155, June.
  6. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
  7. Godwin Nwaobi, 2002. "A vector error correction and nonnested modeling of money demand function in Nigeria," Economics Bulletin, AccessEcon, vol. 3(4), pages 1-8.
  8. Jamie Emerson, 2006. "The Quantity Theory of Money: Evidence from the United States," Economics Bulletin, AccessEcon, vol. 5(2), pages 1-6.
  9. Costas Karfakis, 2002. "Testing the quantity theory of money in Greece," Applied Economics, Taylor & Francis Journals, vol. 34(5), pages 583-587.
  10. repec:ebl:ecbull:v:3:y:2002:i:4:p:1-8 is not listed on IDEAS
  11. 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.
  12. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
  13. Duck, Nigel W, 1993. "Some International Evidence on the Quantity Theory of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 1-12, February.
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