On black market exchange rate and demand for money in developing countries: The case of Nigeria

This paper examines the hitherto unexplored question of the effects of the black market exchange rate expectations on the domestic demand for money in Nigeria. This study finds that real income and expected inflation rates are the appropriate scale and opportunity cost variables for the demand for money function in Nigeria. The results also suggest that depreciation in black market exchange rate exerts a significant negative impact on the domestic demand for money. A policy implication of this research is that since a depreciation of the black market exchange rate tends to decrease the demand for money, it should be taken into account in the execution of monetary policy. The authors would like to thank an anonymous referee for helpful suggestions which substantially improved the quality of the paper. This research was supported in part by a summer research grant from the College of Business Administration, University of New Orleans.