Empirical Verification of Milton Friedman’s Theory of Demand for Real Money Balances in Nigeria: Generalized Linear Model Analysis

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Odior, E.S.O.
Alenoghena, R.O.
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Journal of Empirical Economics
This study empirically investigates the relationship between real money balances (demand for money) using the Milton Friedman’s money demand function and real income, bonds, equities, stocks, interest rates, and inflation rate in Nigeria. The study used annual time series spanning 32 years, a sample period from 1981-2013. Methodically, this study models a standard money demand function and employed the use of ADF - Fisher Chi-square and Phillips-Perron test statistic to test for the unit root, the Engle-Granger single-equation to test for the cointegration and using the Generalized Linear Model (GLM) (IRLS - Fisher Scoring) method to dilate the impacts of the explanatory variables on the explained variable and using the Ramsey Reset Testtodiagnostics for functional form misspecification. Partially consistent with theoretical postulates, this study finds that money demand function is partially stable in Nigeria for the sample period and that income; inflation and lag of real money demand are the most significant determinants of the demand for money. The study shows that real money demand positively responds to an increase in real income, inflation and past real money demand and negatively to a rise in the interest rates spreads. It was also gathered that stock market variables can improve the performance of money demand function in Nigeria.The study recommended policies aimed at improving stock market activities and also monetary targeting as a tool for inflation control.
Milton Friedman , Money Demand , Generalized Linear Model
Odior, E. S. & R. O. Alenoghena (2016), “Empirical Verification of Milton Friedman’s Theory of Demand for Real Money Balances in Nigeria”: A Generalized Linear Model Analysis: Journal of Empirical Economics, Vol. 5, No. 1, Pp, 35-50