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IMPACT OF MONEY SUPPLY ON ECONOMIC GROWTH IN NIGERIA (1981-2015)

Dept: ECONOMICS File: Word(doc) Chapters: 1-5 Views: 3

Abstract

This study examined the effect of monetary supply on economic growth in Nigeria for a period of 36 years (1981-2015). The study adopted econometric techniques of the Ordinary Least Square and Error Correction Mechanism to analyze the time series data. The study found out that money supply is negative and insignificant at influence economic growth in Nigeria. The study further revealed that monetary policy rate is a significant negative determinant of economic growth in Nigeria. The study finally showed that exchange rate is negatively related to economic growth in Nigeria and there is no causal relationship between economic growth and money supply in Nigeria. The study recommended that government through the monetary authorities should maintain stable and low exchange rate and avoid actions that will lead to exchange rate fluctuations.

1.1                 Background of the Study

Nigeria economics is characterized as a medium income, mixed economy and emerging market with expanding financial service communication, technology and entertainment sector. As at 2015, it was ranked the 26

th

 in the world in terms of GDP and is the largest economy in Africa (Based on rebased figures announced in April 2014) (Anyanwu and kalu 2014).

Economic growth can be regarded as important macroeconomic objectives of the government given the fact it visibly impacts on the standard of living. The price level in Nigeria has witnessed profound fluctuations since 1970 which cause inflation. Persistent inflation and limited bank credit have been held responsible for the systematic crisis in the banking sector, slow growth of manufacturing and agricultural sectors, reduced productivity and generally low and slow economic progress (Missibau and Muhammed 2011)

The relationship between money supply and economic growth in Nigeria has been receiving attention than any subject matter in the field of monetary economics in recent years. Economics differs on the effect of money supply on economic growth. While some agreed that variation in the quantity of money is the most important determination of economic growth and countries that devote more time to study the behavior of aggregate money supply experiences more variation in their economic activitieswhile others are skeptical about the role of money on gross national income.

Money supply is the entire stock of currency and other liquid instrument circulating in a country’s economy as of a particular time. It includes safe assets such as cash, coins and balance held in checking and savings account that businesses and individuals can use to make payments or hold as short term investment. Monetary policy refers to the combination of measures design to regulate the value, supply and cost of money in an economy, in consonance with the expected level of economic activities (Okwu,Obiakor, and Falaiye and Owolabi 2011). For most economists, objectives of money supply includes; Price stability, maintenance of balance of payment, promotion of  employment, output growth and sustainable development (Folawewo and Osinubi 2016). These objectives are necessary for the attainment for internal and external balance and the promotion of long run economic growth(Imoughele 2012).

In discussing the concept of money supply and its impact, two other issues should come to our mind which is state of inflationary pressure and the unemployment rate. According to the monetarist, an increase in money supply in an economy cause an increase in general price level of commodities which brings about inflationary in country(Uzougo 1981). Also related to the issue of inflation is the issue of unemployment which is the primary goal of an economy so as to produce as many goods and services as possible while maintaining an acceptable level of price stability, but the major goal will be very difficult to attain at high inflation rate and price instability due to excess money supply in the economy.This research work therefore would review the techniques involved in the control of money supply in Nigeria.

1.2    Statement of the Problem

The study of this nature is always necessitated by the existence of certain problems.The problem that trigged off this work is the recurrence of general feeling that a continuous annual rate of money increase will adversely lead to inflation and may deny the intended effect of the use of monetary policy measures to influence economic growth, thus requirepolicyresponse.

In recent time, the inflationary pressures have succeeded in bringing about devaluation in Nigeria’s value as a result of expansionary measure in money supply. According to ( Kaufman 1978), money is closely related to aggregate level of spending, prices, income, production of goods and services and employment than any other single economic variable. An excess demand for goods and services in return lead to increase in price and deterioration of the balance of payment position. Typically in periods of high inflation, the horizon of the investors is very short and resources are diverted from long term investment to those with immediate return and inflation hedges, including real estate and currency speculation. In the light of the foregoing, all modern economics considers monetary management as an integral part of their responsibilities.

1.3     Research Question

From the above issues the research work will address the following relevant question:

1 Isthere anycausal relationship between money supply and economic growth in Nigeria?

1. What is the impact of money supply on Nigeria economic growth?

1.4      Objectives of the Study

As a result of the problems highlighted above the researchers desire is to achieve the following objectives:

1. To determine the causal relationship between money supply and economic growth in Nigeria.
2. To determine the impact of money supply on economic growth in Nigeria

1.5       Research Hypothesis

This work is interested in testing the hypothesis below.

H0

1

: There is no significant causal relationship between money supply and economic growth

H0

2

: Money supply has no significant impact on economic growth in Nigeria.

1.6       Significance of the Study

This research work will help us to investigate into the beneficial effects of the control of money supply especially its impact on economic growth in Nigeria. It will also add to the existing knowledge about the relationship between money supply and inflation in Nigeria. It will equally help students, government, policy makers and corporate bodies in areas relating to monetary policy’ the volume of credit to be supplied and economic growth stabilization.

The government that makes both fiscal and monetary policy will find the study important, it will guide its choice of policy option especially to work towards achieving its vision to become one of the best. The Central bank of Nigeria whose duty among others, is to assist government in the implementation of its monetary policy will find the study relevant as it shall help for valuable piece of advice to the government on some of the dangers that may be identified by the study. Also this study shall also be significant by private sectors especially those who may have research interest as it shall guide the private decision. The study shall also form reasonable tool for the private sectors contribution to national debates.

1.7     Scope and limitation of the study

The study shall employ annual time series data of gross domestic product (GDP), real interest rate (RIR), Real exchange rate (RER), and money supply (M2) from 1980 to 2016. The data will be obtained from central bank of Nigeria statistical bulletin several years.