Re-Appraisal of the Validity of Long-Run Money Neutrality: an Evidence from Nigeria
Keywords:Money Neutrality; Money supply; Johannsen Co-integration; Fishers effect; Nigeria
The study re-appraised the validity of long-run money neutrality in Nigeria. The reason for
this owes from the dilemma faced by monetary authorities via their inabilities to utilize an effective
monetary policy that can drive and actualize her key macroeconomic objectives in a sustainable manner.
The study employed Johannsen co-integration test and Vector error correction mechanism approach to
re-validate the tenacity of money neutrality in Nigeria, both in the long and short-run using annual time
series data from 1981 to 2018. The results from the Phillips curve model refutes the validity of longrun
money neutrality while that of Fishers effect relation exerted partial long-run money neutrality in
Nigeria. Hence, revealing that Fishers effect is more effective in validating money neutrality in Nigeria
comparatively. Similarly, the Normalized co-integration test and the VECM estimate, supported that of
the above. Also, the error correction model (ECM) suggest that, for money to be wholly neutral in the
long-run, it will take one year and nine months. Consequently, the study concludes that the old debate
of money neutrality is not entirely practicable in Nigeria due to the existence of nominal rigidity and
partial violation of the classical and monetarist dichotomies of monetary aggregates. Based on the above
conclusion, the study recommends that the government should adopt sound policy coordination to
achieve an overall macroeconomic objective in the long-run. Furthermore, the CBN should put all
measures in place to suppress the uncomplimentary time lag between the time they spot the need for
changes in monetary policy and the time to take action, to enhance a successful result of fine-tuning
monetary policy instruments.
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