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Financial innovation and the stability of money demand in Nigeria

Author

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  • Augustine Ujunwa
  • Emmanuel Onah
  • Angela Ifeanyi Ujunwa
  • Chinwe R Okoyeuzu
  • Ebere Ume Kalu

Abstract

Studies that explore the relationship between financial innovation and the stability of money demand in Africa use the indirect measure of financial innovation. Previous studies on Nigeria also ignored total monetary aggregates (M3), despite its importance to monetary policy formulation and liquidity management. This paper contributes to the existing literature in two ways; first, we expand the generic money demand function to include the direct measure of financial innovation. Second, we test the model on Nigeria using a broader definition of money demand—narrow money (M1), broad money (M2) and total monetary aggregates (M3). We employ the Pesaran et al. (2001) autoregressive distributed lag (ARDL) bounds test approach to cointegration in estimating the respective equations and find evidence of a long‐run relationship between money demand and financial innovation. The CUSUM and CUSUM‐of‐Squares tests reveal stable money demand across the three measures of money demand, which indicates that the inclusion of financial innovation has not altered the long‐run stability of money demand in Nigeria.

Suggested Citation

  • Augustine Ujunwa & Emmanuel Onah & Angela Ifeanyi Ujunwa & Chinwe R Okoyeuzu & Ebere Ume Kalu, 2022. "Financial innovation and the stability of money demand in Nigeria," African Development Review, African Development Bank, vol. 34(2), pages 215-231, June.
    • Handle: RePEc:bla:afrdev:v:34:y:2022:i:2:p:215-231
    DOI: 10.1111/1467-8268.12631
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