MODELING NIGERIAN NARROW MONEY AND QUASI-MONEY USING BAYESIAN VECTOR AUTOREGRESSIVE APPROACH

Abstract

This study examines the application of Bayesian Vector Autoregressive model in modeling Nigerian narrow money and quasi money as a guide for monetary policy, using monthly data from 2015 - 2022. The objectives include to; model and estimates the interaction between Nigerian narrow money and quasi money, determine the direction of causality, significance of the causality among the variables, and determine the fractions in each variable explained by the changes in the other variables. The data used for the study were narrow money and quasi money, extracted from the Central Bank of Nigeria online statistics bulletin. The model used in the study is Bayesian Vector Autoregressive models. The results of the descriptive statistics revealed that all the series are statistically significant at the 5 percent level of significance. Augmented Dickey Fuller (ADF) and Phillip Perron (PP) test were used to test for stationarity of the variables under investigation. The results of Johansen Cointegration test showed that there is no cointegration or long-run equilibrium relationship between narrow money and quasi money at a 0.05 significance level. The Adjusted R-square value indicates that 97.7% variation in future narrow money values is explained by first and second per-determined value of narrow money itself and quasi money. Th narrow money has a significant effect on quasi money during the studied period.  The result of VAR model stability test (AR root circle) satisfied the stability condition, with all characteristic root lying inside the circle. The result of the impulse response function revealed that narrow money responded positively to quasi money. It was found that narrow money granger caused quasi money. This suggests that changes in the money supply have potential effect on economic activity through the narrow-money market, which may have implications for monetary policy decision.  Therefore, it was recommended that there should be adequate monetary policy development measures to capture both short-run and long-run relationship between the study variables, including structural reforms to address issues related to shocks from one variable to the other.