Abstract

This study test for the validity of Milton Friedman’s Quantity Theory of Money, using Nigeria Data. Variables tested against real money demand for Nigeria were real income, bonds, equities, stocks, wealth, and inflation rate. The study used annual time-series spanning 47 years, a sample period from 1970- 2016. Methodically, this study models a standard money demand function and employed the use of ADF - Fisher Chi-square and Phillips-Perron test statistic to test for the unit root, the Engle-Granger single-equation to test for the cointegration and using the Autoregressive Distributed Lag (ARDL) model to dilate the impacts of the explanatory variables on the explained variable and using Pairwise Granger Causality to test for the causal effect between real demand for money and wealth. Partially consistent with theoretical postulates, this study finds that money demand function is partially stable in Nigeria for the sample period and that income; return on stock and return on equity are the most significant determinants of the demand for money.  The study shows that real money demand positively responds to an increase in real income and wealth and negatively to a rise in the interest-bearing assets and inflation. It was also gathered that stock market variables can improve the performance of money demand function in Nigeria. The study recommended policies aimed at improving stock market activities and also, monetary targeting as a tool to boost aggregate demand and income.