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THE IMPACT OF MONEY SUPPLY ON ECONOMIC GROWTH IN NIGERIA

ABSTRACT

The impact of oney supply on Nigerian economic growth was investigated in this study. The variable in the model is real gross domestic product (real GDP), whereas the regressors are broad money supply, real exchange rate, and real interest rate. For the years 1981 to 2010, data was gathered from the CBN statistics Bulletin. The analysis was carried out using ordinary least square techniques with the help of the Stata 10 software program. According to the findings, real interest rates and real exchange rates in Nigeria during the study period had no impact on real gross domestic product (real GDP), whereas broad money supply, the only significant regressor, had an impact on real gross domestic product (real GDP) during the study period. The key factor contributing to the poor performance of monetary policy tools in influencing real GDP in Nigeria has been highlighted as time lags, which now make any policy implemented by the government take many months to fully take effect. As a result, because wide money supply is statistically significant, the effectiveness of affecting real gross domestic product in Nigeria may be enhanced by focusing on broad money supply rather than monetary target variables.

CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY

In recent years, the relationship between money supply and economic growth has gotten more attention than any other topic in the field of monetary economics. Economists disagree about how the money supply affects economic growth. While some agree that variations in the quantity of money are the most important determinant of economic growth and that countries that devote more time to studying the behavior of the aggregate money supply experience significant variations in their economic activities (Handle 1997), others are skeptical of the role of money in gross national income (Robinson 1950, 1952).
Evidence suggests that there has been a link between money stock and economic expansion or activity in Nigeria since 1980. Nigeria has been able to control her economy through a variety of means over the years. Various techniques of stabilization, ranging from fiscal to monetary policy, were adopted as a result of the consequence of the drop of oil prices in 1981 and the balance of payment (BOP) deficit encountered during this period. Ikhide and Alwoda (1993) determined that increasing interest rates would reduce the money stock of money, lowering the gross national product (GNP). As a result, the Nigerian economy bears out the premise that money stock varies with economic activity. As previously stated, the money supply has a significant impact on economic activity in both established and emerging economies. The basic failure of many African countries to achieve growth and development was due to a lack of supply of monetary aggregates in general and money stock in particular. When we talk about the concept of money supply and its effects, we frequently bring up the state of inflationary pressure and the unemployment rate. According to monetarists, a rise in a country’s money supply generates an increase in the overall price level of commodities, resulting in inflation (uzougu 1981). Also related to the issue of inflation is the issue of unemployment, which is the primary goal of any economy: to produce as many goods and services as possible while maintaining an acceptable level of price stability. However, with high inflation and price instabilities due to an excess money supply in the economy, this major goal will be very difficult to achieve.

STATEMENT OF THE PROBLEM

The existence of certain difficulties always necessitates a research of this sort. The main issue that prompted this research is the economy’s recurrence of general price instability, chronic inflationary pressures, and unemployment, despite a variety of monetary policy tools established and implemented over the years.
There’s also the concern that a continuous annual rate of money increase may adversely affect the rate of price level, resulting in inflation. This could negate the desired consequences of using monetary policy to drive economic growth, necessitating a policy reaction. These inflationary pressures have recently resulted in a devaluation of Nigeria’s currency as a result of monetary expansionary actions.

The following essential questions will be addressed as a result of the foregoing issues:
a) How does koney supply affect Nigeria’s economic growth?
b) How can monetary policy be used to ensure that it achieves its intended goal of encouraging economic growth?

OBJECTIVE OF THE STUDY

As a result of the aforementioned issues, the researcher wishes to accomplish the following goals: 1. Determine the impact of money supply on Nigerian economic growth.
2. Making recommendations for how the money supply should be used more effectively in Nigeria to achieve its intended objectives of fostering economic growth.

HYPOTHESIS OF THE STUDY

The hypothesis is based on objective 1 because it enquires into what can be revealed by statistical means, whereas objective 2 merely entails providing suggestions. This work is interested in evaluating the following hypothesis:
Ho: money supply has had no effect on Nigeria’s economic growth over the years.
H1: the money supply has had an impact on Nigeria’s economic growth over the years.

SIGNIFICANCE OF THE STUDY

This research will aid us in determining the positive effects of money supply regulation, particularly their influence on Nigerian economic growth. It will also contribute to what is already known about the relationship between Nigeria’s money supply and inflation.
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 implications of this are not far-fetched, as field research could lead to better policy development and outcomes.

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