Demand for Currency Outside Banks (Cob) in Nigeria

Abstract

This paper extends the empirical research strategy developed for modeling demand for M1 in Nigeria in Teriba (2006a) to one of its two sub-components, currency outside banks (COB). However, none of our findings for M1 stand up for COB. Specifically, the long run equilibrium relationship between the variables in the transactions demand framework could not be shown to exist for COB in Nigeria. The non-normality of the residuals of the reduced ECM for COB renders the model un-interpretable. Three outliers (when the residual exceeded the standard error bars) can be identified over the 1960Q1 to the 1995Q4 sample-period. The first happened around 1967/68 and coincides with the outbreak of the Nigerian civil war; the second happened in 1974 and coincides with the onset of the oil-boom; the third happened around 1984 and coincide with the sudden change (within a couple of months) of Naira notes by a new military government to check counterfeiting. Each of the associated events probably can individually or collectively be responsible for the residual non-normality. Dummies for each of the three shocks were included, but the residual non-normality persisted. Consequently, we are unable to recover any well-behaved model for COB for Nigeria that can be compared with models already derived for M1 and demand deposits (Teriba (2006a-d)).

Keywords: Demand for money, currency outside banks (COB), transactions, interest rates, emerging markets, Nigeria

JEL Classification: C51, E41, O16