Effect of Money Supply on Economic Growth in Nigeria: 1980-2018
CHAPTER ONE
OBJECTIVES OF THE STUDY
The main objective of this study is to examine the effect of money supply on economic growth in Nigeria from 1980-2018
The specific objectives of the study are:
- To examine the trends of money supply and economic growth in Nigeria from 1980 to 2018
- To evaluate the effect of money supply on economic growth in Nigeria
- To establish the existence of long term relationship between money supply and economic growth in Nigeria
CHAPTER TWO
REVIEW OF RELATED LITERATURE
This chapter examines the ideas or views of various authors who took keen interest in the study. It comprises of conceptual framework, theoretical review, empirical review and an evaluation of the literature reviewed.
CONCEPTUAL LITERATURE
MONEY SUPPLY
The money supply refers to all the currency and other liquid instruments in a country’s economy on the date measured. The money supply roughly includes both cash and deposits that can be used almost as easily as cash. Generally, governments issue paper currency and coin through some contribution of their central banks and treasuries. Bank regulators influence money supply to the public through the requirements placed to hold reserve, how to extend credit and other regulations. Economists analyze money supply and develop policies revolving around it through controlling interest rates and increasing or decreasing the amount of money flowing in the economy. Public and private sector analysis is performed because of the money supply’s possible impacts on price level, inflation and the business cycle. The money supply is mostly regarded in some nations as the money stock as increase in money supply cause observable changes in money stock, which typically lowers interest rates, which in-turn generates more investment and puts more money in the hands of consumers, thereby stimulating spending. Businesses respond by ordering more raw materials and increasing production. The increased business activity raises the demand for labour. The opposite can occur if the money supply falls or when its growth rate declines.
The first known attempt to define the concept of money supply in Nigeria economy was done by Roman and Newlyn (2006), both monetarists who agreed that the definition of money supply should based 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 the economy. Meanwhile, the supply of money implies the amount of cash and currencies available in economy in sufficiently liquid and spendable forms at any point in time. It is on this notion that money forms a very important instrument which can be manipulated as a money stock variable in order to control money supply in the economy. But the formation of money stock in any modern economy have been found to be more than just a currency as the case may be, but the extent to which the financial system is developed determines the other instruments. This is why the federal government monetary management (FGMM) basically, is to influence macro-economic variables and the use of appropriate instruments which vary between developing and developed countries.
Money supply can also be defined as the sum of the money holdings of all the members of the society. This could be either M1 or M2 in Nigeria, M1, M2 and M3 in United Kingdom (UK) or M1, M2, M3 and M4 in United States of America (USA). The M1 is a narrow measure of money supply, it focuses on the role of money as a medium of exchange and defines money as “currencies in circulation outside the banks plus demand deposits held in banks” (i.e. C+DD).
CHAPTER THREE
RESEARCH METHODOLOGY
This chapter presents the research method that is considered suitable for the purpose of achieving the set objectives of this study. The nature and sources of data used in this work, the research design, model specification, analytical technique, and limitations of the method are also contained in this chapter.
RESEARCH DESIGN
This study adopts econometric techniques of data analysis to achieve its set objectives. The Auto Regressive-Distributive Lag (ARDL) technique was used to test the relationship among variables in the model because the result of the unit root test shows stationarity both at level and first difference. Other econometric techniques were also used to test the appropriateness of the model. The work adopts a secondary method of research.
NATURE AND SOURCES OF DATA
Data used for this work are secondary in nature. They are annual time series spanning the period 1980 to 2018. All data used in this study were obtained from the World Bank’s World Development Indicator 2018, and the Central Bank of Nigeria (CBN) Statistical Bulletin 2018.
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS
This chapter focused on the presentation and analysis of data collected from CBN Statistical Bulletin and World development indicators. Analysis and interpretation of results were given by making deductions from the data using the results obtained.
CHAPTER FIVE
SUMMARY, CONCLUSION, AND RECOMMENDATIONS
This study examined the effect of money supply on economic growth in Nigeria from 1980 to 2018. The dependent variable used was real gross domestic product growth rate (RGDP) and the explanatory variables are Broad Money Ratio to Gross Domestic Product (M2/GDP), Exchange Rate (EXR), interest rate (INR), Total Government Expenditure to Gross Domestic Product (TGE/GDP) and Labour Force Participation (LFP).
The study sets out three specific objectives – including: to examine the trends of money supply and economic growth in Nigeria from 1980 to 2018, to establish the possibility of existence of a long-run relationship between money supply and economic growth in Nigeria, and to evaluate the effect of money supply on economic growth in Nigeria. Each of these objectives is analyzed using distinct regression or estimation technique which is clearly and separately reported in the study. The study employed time series data on Real Gross Domestic Product (RGDP), Broad Money Ratio to Gross Domestic Product (M2/GDP), Exchange Rate (EXR), interest rate (INR), Total Government Expenditure to Gross Domestic Product (TGE/GDP) and Labour Force Participation (LFP) which were extracted from CBN Statistical Bulletin and World Development Indicators (WDI) from 1980 to 2018. The result of the ARDL bounds test for co-integration revealed that a long run relationship exist between money supply and economic growth in Nigeria. The long-run coefficients indicated that with the exception of money supply and labour force participation, the control variables insignificantly impact output level in the long-run. However, money supply and labour force participation was found to have a statistically significant impact on real gross domestic product in the long run. Similarly, the short-run coefficients revealed that money supply significantly impact economic growth in the short run. Accordingly, the ECM coefficient was negative and statistically significant implying that in the case of any disequilibrium in output, the system will correct itself from the short-run towards reaching long-run equilibrium at the speed rate of 75.9% every quarter.
CONCLUSION
The findings of this study show that money supply has a positive effect on economic growth. Therefore, this study concludes that money supply is an effective instrument that can be deployed by monetary authorities for macroeconomic stability and for achieving positive economic growth in Nigeria both in the present and in the long run.
POLICY RECOMMENDATIONS
Based on the findings of this study, the following policy recommendations were made:
1.In seeking to promote economic growth, Nigeria’s monetary authorities, that is, the CBN should be more committed to the mission of price stability, as well as improving the regulatory and supervisory frameworks to secure a strong financial sector for efficient intermediation.
2.For money supply to have a desired impact on the real economy and inflation, which is the fundamental objective of monetary policy, it is essential that changes in the short- term market interest rate should ultimately transform into changes in other interest rates in the economy (that is, interest rate changes are passed through to retail interest rates for loans and deposits), which then influence the overall level of economic activity and prices.
3.Complementary fiscal policy measures should be undertaken by the government alongside monetary policy, as both are re-enforcing and complementary in regulating economic activities, that is, while using expansionary monetary policy they can as well make use of contractionary fiscal policy.
REFERENCES
- Ayodeji, A and Oluwole, A (2018). Impact of Monetary Policy on Economic Growth in Nigeria. Open access library journal, 5(e 4320), pp1-13.
- Adegbite, T. A. & Alabi, W. O., “Monetary policy and economic growth: The Nigerian Experience (1970-2010),” Prime Journal of Business Administration and Management, 3(1), (2013): 822-833. Retrieved from www.primejournal.org/BAM/pdf/…/Adejare% 20and%20Omodara.doc.p.
- Adeoye, B., Ojapinwa, T. V. & Odekunle, L. A. (2014): Monetary Policy Framework and Pass-Through in Nigeria: A Missing Ring. British Journal of Art and Social Sciences, Vol. 17, No. 1
- Akujuobi, L. E. (2010): Monetary Policy and Nigeria’s Economic Development. African Research Review, An International MulihtyscipHnary Journal, Ethiopia, Vol. 4, No. 4
- Butkiewics, J. L. (2013): Financial Crisis, Monetary Policy Reform and Monetary Transmission Mechanism in Turkey. Working Paper Series, Department of. Economics, University of Delaware.
- Chuku C. A. (2009): “Measuring the Effects of Monetary Policy Innovations in Nigeria: A structural Vector Autoregressive (SVAR) Approach,” African Journal of Accounting, Economics, Finance and Banking Research, Vol.5, No.5, pp 112-29.
- CBN, “What is Monetary Policy?” Understanding Monetary Series No. 1 (2011).
- Chimobi, O. P. & Uche, U. C., “Money, price and output: A causality test for Nigeria,” American Journal of Scientific Research, 8, (2010): 78-87.
- Danjuma, I., Jbrin, S. M. & Blessing, S. E., “An assessment of the effectiveness of monetary policy in combating inflation pressure on the Nigerian economy,” Erudite Journal of Business Administration and Management, 1(1), (2012): 7-16. Retrieved from www.eruditejournals.org/ejbam.
- Diamond, R., “Irving Fisher on the international transmission of boom and depression through money standard,” Journal of Money, Credit and Banking, 35, (2003): 49- 58.
- Fasanya, I, O, Onakoya, A D, O, & Agboluaje, M, A. (2013), Does monetary policy influence economic growth in Nigeria? Asian Economic and Financial Review, 2013, 3(5) 635-646.
- Folawewo, A. O. and Osinubi, T. S (2006). Monetary Policy and Macro-Economic Stability in Nigeria; A Rational Expectation Approach: Journal of Social Science. Vol. 12, No. 2, pp 93-100.
