The Central Bank Digital Currency and its impact on money demand in developing economies: evidence from Nigeria

Abstract

The introduction of Central Bank Digital Currency (CBDC) has sparked significant interest among policymakers, financial institutions, and researchers due to its potential implications for monetary policy, financial stability, and money demand. This study investigates the impact of the eNaira, Nigeria’s CBDC, on the demand for money, analyzing both short-run and long-run effects. Using an autoregressive distributed lag (ARDL) model, the study examines the relationship between CBDC adoption and traditional determinants of money demand, such as income, interest rates, inflation, and financial innovation. The empirical findings reveal a dual effect of CBDC on money demand. In the short run, CBDC adoption exhibits a positive relationship with money demand, suggesting that the introduction of the eNaira initially complements existing monetary aggregates by increasing transactional efficiency and fostering financial inclusion. However, in the long run, the results indicate a negative relationship, implying that sustained CBDC usage may lead to a decline in the demand for traditional money. This shift is attributed to disintermediation effects, reduced reliance on physical cash, and potential substitution effects as digital currency becomes more integrated into the financial ecosystem. These findings carry important implications for monetary policy and financial stability in Nigeria. The short-run increase in money demand suggests that CBDC can enhance liquidity and improve payment systems. However, the long-run decline in money demand raises concerns about the effectiveness of conventional monetary tools, such as interest rate adjustments and reserve requirements. Policymakers must therefore carefully manage the transition to digital currency, ensuring that it complements existing monetary policy frameworks while mitigating potential disruptions to the banking sector. Overall, this study contributes to the growing body of literature on digital currencies and monetary policy by providing empirical evidence on the evolving dynamics of money demand in the presence of CBDC. Further research is recommended to assess the broader macroeconomic effects of CBDC adoption, including its impact on financial intermediation, inflation dynamics, and economic growth in Nigeria.