Abstract
The study hypothesized the existence of regime shifts in the conduct of monetary policy, occasioned by changing liquidity conditions in the domestic banking system in Nigeria. Within the context of this prognosis, the study tests the stability of the money multiplier, utilizing methodological procedures that allow for the explicit consideration of regime shift bias in the specification of the model and the empirical estimation. The study found the existence of a stable long run relationship between broad money and the monetary base, confirming that the necessary condition for monetary control within a multiplier frame work is satisfied for Nigeria. Also, the spate of quantitative easing by the Central Bank of Nigeria to ameliorate adverse liquidity conditions and the lingering effects of the global financial crises occasioned a structural break in monetary policy, determined endogenously to have occurred in November 2009.
Highlights
PUBLIC INTEREST STATEMENTA prerequisite for policy regimes that target the levels of monetary stocks is the ability of the monetary authority to control the quantity of money stock supplied and forecast the changes in the factors that affect the resulting money supply
Background to the studyA monetary policy regime that targets the money stock owes its effectiveness to the stability of the money multiplier relation; otherwise, the primary objective of monetary policy, i.e. price stability, cannot be achieved by targeting the monetary stock (Feige & Parkin, 1971)
Summary and conclusion The thrust of the paper is to examine if there exists a stable relation between a measure of the monetary aggregate (M2) and the monetary base, while admitting the existence of a regime shift in the conduct of monetary policy from an easy to tight policy stance, occasioned by changes in the liquidity conditions in the domestic banking system
Summary
A prerequisite for policy regimes that target the levels of monetary stocks is the ability of the monetary authority to control the quantity of money stock supplied and forecast the changes in the factors that affect the resulting money supply. The study concluded that the functions underlying the adjusted money multipliers were not stable for most of the period of the study, further confirming his earlier findings We argue that these studies have mainly relied on the use of univariate tests applied on the money multiplier in order to assess its stability and that the apparent rejection of the existence of stable long run relationship in the money multiplier may not be unrelated to the neglect of the fact of significant discrete changes in the Nigeria’s financial system and the conduct of monetary policy in their empirical procedures. To keep in consonance with the form of Gregory and Hansen co-integration analysis as indicated in Equation (10), we estimate the Zivot and Andrews’ model to test for a unit root against the alternative of a one-time structural break in the data. Since it is widely acknowledged that the global financial system was adversely affected in 2008, leading to one of the major recessions in recent years, we will use this information while estimating the break in the relationship
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