The paper aimed at estimating a narrow money demand function of Nigeria from 1970 to 2010. The autoregressive distributed lag bounds test approach to cointegration was utilized more appropriately for estimation in small sample studies. To determine the characteristics of the time series used in the study, augmented Dickey–Fuller (ADF) and Philips–Perron (pp) unit root tests were adopted. The empirical results found cointegration relations among narrow money demand, real income, short term interest rate (STIR), real expected exchange rate (REER), expected inflation rate (EIR), and foreign real interest rate (FRIR) in the period under investigation Real income and interest rate are significant variables explaining the demand for narrow money in Nigeria, although real income is a more significant factor in both the short and long term. Evidences show that Nigeria was not immune from external shocks originating from capital flight due to changes in REER and FRIR.
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