Application of Bayesian Vector Autoregressive Models in the Analysis of Quasi Money and Money Supply: A Case Study of Nigeria

Abstract

Aims: The aim of this study is to model the relationship between Nigerian quasi money and money supply using the Bayesian Vector Autoregressive (BVAR) model. Study design:  The study collected and analyzed monthly data from the Central Bank of Nigeria (CBN) money and credit statistics over an 8-year period (November 2015 to December 2022). The analysis utilized both Vector Autoregressive (VAR) Model and BVAR model to examine the dynamics between these variables and their implications for monetary policy. Methodology: The study employed the Bayesian Vector Autoregressive (BVAR) model to analyze the relationship between Nigerian quasi money and money supply. Monthly data from the Central Bank of Nigeria (CBN) over an 8-year period was collected and subjected to both Vector Autoregressive (VAR) Model and BVAR model for analysis. Results: The findings indicated that there is no long-run relationship between Nigerian narrow money and quasi money, but quasi money does granger cause changes in narrow money, and vice versa. This suggests a multi-directional effect between the two variables. The BVAR model consistently outperformed the VAR model in terms of higher Adjusted-R² values, indicating its stronger ability to explain the variance in the data. The BVAR model provided a more robust and accurate representation of the relationship between these variables. The model exhibited stability and the absence of heteroscedasticity in the residuals, indicating a stable relationship between the variables. The impulse response function showed an immediate impact of changes in narrow money on the overall money supply in Nigeria. Conclusion: This study contributes to existing knowledge by empirically examining the relationship between Nigerian narrow money and quasi money and also concluded that there existed no co-integrating relationship between narrow money and quasi money, which has important implications for effective monetary policy strategies, particularly in Nigeria.