THE IMPACT OF MONEY SUPPLY ON ECONOMIC GROWTH IN NIGERIA (1981-2010)

THE IMPACT OF MONEY SUPPLY ON ECONOMIC GROWTH IN NIGERIA (1981-2010)

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 government to take many months to achieve its full effect. In effect to this, effectiveness of influencing real gross domestic product in Nigeria maybe promoted by emphasizing on broad money supply instead of on monetary target variables due to the fact that broad money supply is statistically significant.

CHAPTER ONE
INTRODUCTION

1.1 BACKGROUND OF THE STUDY

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 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 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.

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 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.

CHAPTER TWO: REVIEW OF LITRATURE

2.1 THEORETICAL LITERATURE.

When it comes to considering the relationship between the state of economic growth and the rate at which money is supplied, it is clear that a great amount of empirical and theoretical work remain to be done. With monetary policies and association of monetary policies and association of monetary and fiscal policies in determining the exact influence of money supply, there is a sizeable literature on which this and further researchers can rely, but little of this appears to have penetrated the mainstream of what literature is required in monetary economics.

Although, in case of difficulties in finding much of existing literatures on money supply, policy makers have agreed on that the reason could be the inaccessibility of various channels through which money is supplied. These channels are shared by the federal government fiscal policies via tax cuts and budget spending and the central bank of Nigeria’s monetary options. Yet, having observed that each of the above mentioned policies exert its influence on the quantity of money stock in the economy in the economy, the issue remains the robustness of the surrounding theories. The support of the government had led to the general belief by the policy makers, that central banks does not take full control of the quantity of money supplied to an economy.

However, our literature review is centered on the components and the impacts of monetary policy options in Nigeria economy. The first known attempt to define the concept of money supply in Nigeria economy was done by Roman and Newlyn, both monetarists agreed that the definition of money supply should base on the stage of development of the financial system and the concept of money adopted which serves as a working rule for measurement purposes and guided by the institutional framework of this economy.

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