Economic policy uncertainty and demand for money in Nigeria: New evidence from linear and nonlinear ARDL cointegration

Abstract

The main objective of this paper is to examine the symmetric and asymmetric impact of economic policy uncertainty on demand for money in Nigeria. In money demand function, certain factors like the income, rates of interest and inflation added to exchange rate were identified to be key factors influencing the demand for money. Recent empirical studies investigate uncertainty as a likely factor influencing demand for money. Using a recently introduced economic policy uncertainty index and employing a quarterly data for Nigeria covering 1980Q1 to 2021Q4, the paper investigates the influence of economic policy uncertainty on the demand for cash balances. To realize this objective the linear ARDL and nonlinear ARDL econometric techniques were adopted. The linear ARDL result shows that the economic policy uncertainty have an influence over money demand in the period of short run. However, the effect does not extend to the long run period. The nonlinear ARDL estimates indicate that the economic policy uncertainty has both long and short run effect on the money demand. The results reveal the presence of asymmetric effect of economic policy uncertainty on money demand. In both linear and nonlinear models, the money demand function is stable. This has a policy implication.