Pure Portfolio Approach to Money Supply Determination in Nigeria: A Generalized Method of Moments Approach

Abstract

This study analyses broad money supply in Nigeria using a pure portfolio approach in order to establish an econometric framework which forecasts the Nigerian money multiplier with great precision. Methodologically, the Generalized Method of Moments (GMM) model was modeled to analysis the nature of the framework, where broad money supply is presumed to depend upon changes in various indicators of supply of money and a list of instrumental variables (IV) which were estimated over the period 1970-2010. Integral to this process is to determine if there exist a stable relationship between various measures of money supply, the monetary base and the instrumental variables, given a switch by the Central Bank from a direct to an indirect policy regime. In the results, it was found that there exist partial stable relations between these measures of money supply: the broad money and base money despite regime shifts over the sample period. However, a stable money multiplier was not found. This approach produced a scientific framework that could be used to predict the money multiplier derived from the broad money and could be used to forecast on an annual basis with reasonable accuracy at least in the medium term and projections in the monetary programme.