This study is designed to examine empirically the impact of exchange rate on the stability of\ndemand for money in Nigeria where official and black market exchange rates operate side by\nside due to exchange controls. Variants of money demand model are estimated using monthly\ndata for the period of 2005-2013. Cointegration and system equation techniques combined\nwith CUSUM and CUSUMSQ tests are employed in the data analysis. Results indicate that in\nall the variants of the money demand model, coefficients of exchange rates variable (official\nor black market exchange rates) manifest significant t statistics, meaning that the null\nhypothesis of restricting the coefficients of exchange rates in money demand model in\nNigeria is rejected for each variant. This suggests that coefficient of exchange rates variable\n(OMEXR or BMEXR) belongs to the cointegrating space in all the instances. Judging from\nthe freakiness of the coefficients of the variants of the money demand function and the results\nof the tests for stability of the models combined, the most appropriate demand for money\nfunction for Nigeria appear to be the one that includes M1, the interest rate, inflation rate, and\nofficial exchange rate. This implies that in Nigeria, a greater percentage of the foreign\nexchange demand may be public sector driven and substantial percentage of the private sector\nforeign exchange needs is sourced from the official exchange rate market due to the\nsubstantial disparity between the two rates. This may mean consumers� easy access to official\nexchange rate and transparency in the operation of official exchange rate market in Nigeria.
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