The Velocity of Money and Lessons for Monetary Policy in Nigeria: An Application of the Quantile ARDL Approach

Abstract

The paper investigates the determinants and stability of the income velocity of money while accounting for structural breaks in its approach from the period Q1 1981 to Q4 2023 in Nigeria. The paper extends previous works by accounting for four velocities of money functions having accounted for structural breaks in its approach. The study adopted the Bai and Perron breakpoint test, the Zivot and Andrews, and Perron and Vogelsang structural break unit root tests to determine the break dates and the variables’ stationary properties. In analyzing the main results, the study used the quantile ARDL method to establish the determinants of income velocity of money in Nigeria, while it used the CUSUM tests to establish the stability of money velocity in Nigeria. The study found that the determinants of the velocity of money are per capita income, the exchange rate, financial development, inflation, and the interest rate across the four models. Furthermore, the four velocities of money functions were unstable for Nigeria using the cumulative sum and cumulative sum of squares tests. Consequently, the study recommends effective monitoring and the provision of sound monetary policies to ensure a stable and predictable velocity of money. This can be achieved by understanding and focusing on these key determinants and crafting informed strategies to manage economic growth and stability. This holistic approach ensures that the benefits of economic policies are felt broadly across the economy, ultimately bolstering overall financial health and enhancing the velocity of money, which is crucial for sustained economic progress.