Abstract
Previous studies appear to have concentrated on the effects of currency depreciation on trade balance and macroeconomic policy, while the relationship between money demand and trade balance is scantly documented in the literature. This paper therefore examines the effects of money demand on trade balance in Nigeria. For the analysis conducted, annual time series data covering the period ranging from 1986 to 2018 were used along with the Autoregressive Distributed Lag (ARDL) estimation technique. The long‑run coefficient of money demand was positively signed and statistically significant at 5% level. The positive relationship exhibited by the coefficient of money demand in the long run had a significant influence on trade balance. Thus, this implied that a unit percent increase in money demand would lead to a 1.57% significant increase in trade balance. The implication of this finding was that money demand had significantly influenced trade balance, enhancing the production of goods and fostering investment, which had led to increased growth. The paper recommends that the Central Bank of Nigeria through the Monetary Policy Committee should amend qualitative and quantitative credit control policies with the aim of improving lending to enhance the flow of credit to the real and exporting sector of the economy in order to bring about the desired effect on trade balance. However, the study is limited to an analysis of the existence of the relationship between money demand and trade balance using the Nigerian data set.
Highlights
Trade remains a crucial element needed for economic growth and sustainable de‐ velopment of a country
The monetary approach to trade balance suggests that trade imbalances are es‐ sentially an adjustment mechanism which at equilibrium equates the money stock in existence to the quantity of money demanded in an open economy (Edet, Udo, Etim, 2017)
The positive relationship exhibited by the coefficient of money demand in the long run had a significant influence on trade balance
Summary
Trade remains a crucial element needed for economic growth and sustainable de‐ velopment of a country. Changes in the stock of mon‐ ey and the demand for money, whether determined by exogenous or endogenous shocks, have been a common but controversial issue in most developing countries Several governments of these countries have repeatedly used a stable money de‐ mand function as a means of correcting price instability, trade deficits or overval‐ uation of their exchange rates to increase trade competitiveness and revenue from exports (Rincón, 1999). The ARDL technique was devel‐ oped by Pesaran, Shin, and Smith (2001) to investigate the short‐run and long‐run relationship among variables The choice of this technique stems from the fact that it allowed for joint estimation of relationships between money demand and the trade balance induced movement in Nigeria. The rest of the paper is structured as follows: section two reviews the liter‐ ature on money demand and trade balance, section three reports research meth‐ odology, section four presents the empirical analysis and results, and section five provides the discussion and conclusions, while section six gives recommendations
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