Abstract
The study examined the impact of money supply on economic growth in Nigeria.
In the model specified, real gross domestic product (real GDP) is the regress while
broad money supply, real exchange rate, and real interest rate are the regressors.
Data was collected from CBN statistical Bulletin for the period 1981 – 2010. The
statistical techniques used for the analysis is the ordinary least square techniques
with the aid of Stata 10 software package. The research indicates that real interest
rate and real exchange rate in Nigeria within the period under study failed to
influence real gross domestic product while broad money supply being the only
significant regressor influenced real gross domestic product (real GDP) within the
period under study. It has been identified that the major problem militating against
the poor performance of monetary policy instruments in influencing real GDP in
Nigeria is time lags involved which now makes any policy employed by the
governme
1.1 BACKGROUND OF THE STUDY
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The relationship between money supply and economic growth has been
receiving increasing attention than any subject matter in the field of monetary
economics in recent years. Economists differ on the effect of money supply on
economic growth. while some agreed that variations in the quantity of money is the
most important determinant of economic growth and that countries that devote more
time to studying the behavior of aggregate money supply experiences much
variations in their economic activities(handle 1997),others are skeptical about the
role of money on gross national income (Robinson 1950, 1952).
Evidence has shown that since 1980 some relationship exist between the
stock of money and economic growth or economic activity in Nigeria. Over the
years, Nigeria has been controlling her economy through variations in her stock of
money. Consequent upon the effect of the collapse of oil price in 1981 and the
balance of payment (BOP) deficit experienced during this period, various methods
of stabilization ranging from fiscal to monetary policy were used. Ikhide and
Alwoda (1993) concluded that reducing money stock of money through increased
interest rates would lower gross national product (GNP). Thus the notion that stock
of money varies with economic activities applies to the Nigerian economy. As
already explained money supply exerts considerable influence on economic activity
in both developed and developing economics. The low level of supply of monetary
aggregates in general and money stock in particular had been responsible for the
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fundamental failure of many African countries to attain growth and development.
Various scholars have laid much of the blame for the failure of monetary policies to
translate into economic growth on the government and its agencies as a result of
poor implementation and sincerity on the part of policy executors.
In discussing the concept of money supply and its impacts, two other issues
often come to our mind which is the state of inflationary pressure and the
unemployment rate. According to the monetarist, an increase in money supply in an
economy causes an increase in general price level of commodities which brings
about inflationary in the country (uzougu 1981). Also related to the issue of
inflation is the issue of unemployment which is the primary goal of any economy so
as to produce as many goods and services as possible while maintaining an
acceptable level of price stability, but this major goal will be very difficult to attain
at high inflation rate and price instabilities due to excess money supply in the
economy. This research work therefore, would review the technicalities involved in
the control of money supply in Nigeria.
1.2 STATEMENT OF THE PROBLEM
A study of this nature is always necessitated by the existence of certain
problems. The major problem that trigged off this work is the recurrence of general
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price instability, persistent inflationary pressures and unemployment in the
economy, in spite of the plethora of monetary policy measures adopted and applied
over the years.
There is also this problem of general feeling that a continuous annual rate of
money increases will adversely increase the rate of price level which will directly
lead to inflation, which may deny the intended effects of use of monetary policy
measure to influence economic growth thus, requiring a policy response. Recently,
these inflationary pressures have succeeded in bringing about devaluation in
Nigeria’s currency value as a result of expansionary measures of money supply.
From the above issues, this research work will address the following pertinent
questions:
a) What is the impact of money supply on economic growth in Nigeria?
b) How can monetary policy be used such that its intended effects of promoting
economic growth are assured?
1.3 OBJECTIVE OF THE STUDY
As a result of the problems highlighted above, the researcher desires to
achieve the following objectives;
1. To determine the impact of money supply on economic growth in Nigeria.
2. Recommending ways in which money supply could be used more effectively
in achieving its intended effects of promoting economic growth in Nigeria.
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1.4 HYPOTHESIS OF THE STUDY
The hypothesis is built around objective 1 because it probes into what can be
revealed through statistical means while objective 2 involves only making
recommendations, this work is interested in testing the hypothesis below;
Ho: money supply has no impact on economic growth in Nigeria over the years.
H1: money supply has impacts on economic growth in Nigeria over the years.
1.5 SIGNIFICANCE OF THE STUDY
This research work will help us to investigate into the beneficial effects of
the control of money supply especially its impacts 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 implication of this is not farfetched as research
in the field could lead to a proper and more focused policy formulation, which
would yield much better results.
1.6 SCOPE OF THE STUDY
We rely on the secondary data for this study of which the sources are the
Central bank of Nigeria (CBN) statistical bulletin 2009 and 2010 versions. The
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research work centers on the impact of money supply on economic growth in
Nigeria from 1981 – 2010, It is expected in course of this study that the researcher
will examine and appraise the stock of money supply and its impacts with regards
to growth in the Nigerian economy.