The Long-Run Relationship between Foreign Reserves Inflows and Domestic Credit: Evidence from a Small Open Economy
The Long-Run Relationship between Foreign Reserves Inflows and Domestic Credit: Evidence from a Small Open Economy

Summary/Abstract: This paper investigates whether the Balance of Payments disequilibrium is a monetary phenomenon. The money demand function was formulated and utilised in the empirical testing of the monetary approach to balance of payments in Nigeria. The study applied the Johansen cointegration test, Pantula principle and Error Correction Mechanism (ECM) estimation techniques in the determination of the long and short-run relationships between foreign reserves inflows and domestic credit. The study found that BOP is a monetary phenomenon depending on the nature of the specification of the money demand function. The study recommends that the monetary authorities should impose stringent ceilings on domestic credit as excessive borrowing could cause drastic reduction in the inflows of foreign reserves.

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