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Effect of Money Supply on Economic Growth in Nigeria 1980 to 2018

TABLE OF CONTENTS

Table of Content
List of Tables
Abstract

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study
1.2 Statement of the Problem
1.3 Objectives of the study
1.4 Research Questions
1.5 Statement of Hypothesis
1.6 Significance of the Study
1.7 Scope of the study
1.8 Organization of the study

CHAPTER TWO: LITERATURE REVIEW

2.1 Conceptual Literature
2.1.1 Money Supply
2.1.2 Rationale for Money Supply

2.1.3 Determinants of Money Supply

2.1.4 Control of Money Supply in Nigeria

2.1.5 Economic Growth

2.1.6 Intuitive Nexus between Money Supply and Economic Growth2.2 Theoretical Literature
2.2.1 Theories of Money Supply
2.2.2 Theories of Economic Growth
2.3 Empirical Framework
2.4 Summary of Literature Review and Justification for Study

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research Design
3.2 Nature and Sources of Data
3.3 Model Specification
3.4 A-priori Expectations
3.4.1 Economic Criteria

3.4.2 Statistical Criteria

3.4.3 Definition of Variables in the Model
3.5 Method of Data Analysis
3.6 Limitation of Method

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1 Presentation of results
4.1.1 Graphical Trends in Variables
4.2 Unit Root Test
4.3 ARDL Bounds Test
4.4 Residual Diagnostic Tests
4.4 ARDL Short Run Test
4.5 Discussion of Findings

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary
5.2 Conclusion
5.3 Policy Recommendations
REFERENCES
APPENDIX

 

LIST OF TABLES

Table 1: Unit Root Test Results
Table 2: ARDL Bounds Test
Table 3: ARDL Short Run Test
Table 4: Residual Diagnostics Test Result
Table 5: Long Run Coefficients
Table 6: Short Run Test

LIST OF FIGURES
Figure 1: Trend of Growth Rate of Real GDP Figure 2: Trend of Broad Money to GDP Figure 3: Trend of Exchange Rate
Figure 4: Trend of Interest Rate
Figure 5: Trend of Labour Force Participation
Figure 6: Trend of Total Government Expenditure to GDP

 

ABSTRACT

 This study examined the effect of money supply on Nigeria’s economic growth. 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 study employed econometric techniques of Autoregressive Distributed Lag (ARDL) Bounds and the associated Error Correction Mechanism in estimating the structural parameters of the model. The Bounds test revealed that a long run relationship exist between money supply and growth rate of output in the country. Similarly, the long run coefficients revealed that money supply significantly and positively impact the level of output in the long run. Furthermore, The ECM result also revealed that money supply had a significant and positive effect on economic growth in the short run. Also, the coefficient of the Error correction term was found to be negative and statistically significant at the critical level of 5%. This implies that in the case of any disequilibrium in the economy, the system will correct itself back to long run equilibrium at a speed of approximately 75.9% every quarter. Overall, the study concluded that money supply is a key macroeconomic variable which influences the level of output in the economy. Therefore, the study recommended that there should be complementary fiscal policy measures which should be undertaken by the government along with monetary policy in order to ensure an effective role of money supply in the economy.

 

CHAPTER ONE INTRODUCTION

  • BACKGROUND TO THE STUDY

Economic growth provides crucial information to government, investors, international communities, organizations; both governmental and nongovernmental. This information includes the size of the economy, its rate of growth, GDP per capita, etc. That is why scholars and researchers have embarked on tracing the relationship between economic growth and the factors that fuel its success or otherwise. One of these factors is money supply. The relationship between money supply and economic growth has a theoretical backing. According to Keynesian Theory of Growth, the supply of money tend to influence the equilibrium value of output and employment because an expansion in money supply will raise the price of bonds and reduce the rate of interest, increase the level of investment and output. It should be remembered that in classical theory of inflation the quantity theory of money explain the influence of money supply to be that of raising price or lowering it depending on whether the supply of money is increased or decreased. This shows that if money growth is equal to increases in real GDP, then there will be no inflation (William, 2016).

Other scholars have put up their views concerning how money supply is related to economic growth. Laidler (1993) is of the view that lowering money stock by increasing interest rate would lower Gross Domestic Product (GDP). Handler (1997) argued that variations in the quantity of money supply is the most important determinant of economic growth and nations that sacrifice more time in studying the behavior of aggregate money supply rarely experience poor economic performance and claimed that this is also the views of some economists. Steve (1997) and Domingo (2001) contended that there may not be positive economic growth without an appropriate financial condition. Uduakobong (2014) is of the view that money supply more or less influences Economic growth.

Generally, 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 ( e.g.,handle 1997) 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, 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 have been used. Ikhide and Alwoda (1993) concluded that reducing 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 economies. 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 Nigeria, the issue is still a subject of debate among economists in the sense that some are agitating for expansionary monetary policy to fuel growth while others are claiming that increase in money supply is valid only in the long run while in the short run it will only aggravates the price level of goods and services and therefore negatively affect growth. Also, some scholars claimed that in the short run increase in money supply concomitantly go with increase in output but leads to the increase in price level in the long run.

The monetarists believe that money supply is a tool that gives boost to economic growth based on unexpected increase in money stock (Jawaid, Qadri & Ali, 2011) while the Keynesians argue that money supply has a limited influence on economic growth (Twinoburyo & Odhiambo, 2017).Scholars such as (Chipote & Palesa, 2014; Kamaan, 2014; Inam & Ime, 2017) found that money supply exerts insignificant influence on economic growth thereby substantiating the Keynesian view.However, several other studies have established that money supply enhances economic growth of a nation (Nouri & Samimi, 2011; Onyeiwu, 2012; Havi & Enu, 2014Osasohan, 2014; Prasertet al., 2015; Mohamed Aslam, 2016) among others.

Thus, 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 trend 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 instability due to excess money supply in the economy. This research work is poised to would review the technicalities involved in the control of money supply in Nigeria.

  • STATEMENT OF THE PROBLEM

A study of this nature is always necessitated by the existence of certain problems. The major problem that trigged 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. One of the major objectives of monetary policy in Nigeria is price stability and different monetary policy regimes have been used by the monetary authorities. Despite the various monetary regimes that have been adopted by the Central Bank of Nigeria over the years, inflation still remains a major threat to Nigeria’s economic growth. An examination of the trend in the trade cycles reveals the following circular swings: 1965- 1968 Rapid Decline (Civil War Years), 1969-1971 Revival, 1972-1980 Boom, 1981-84 crash, 1985 – 1991 Renewed Growth, 1992-2010 Wobbling, (CBN, 2010). However, Nigeria has not just been plagued with high volatility in inflation rate alone as there have been cases of deflation as well, for instance, the rapid decline that was recorded from 1965-1968. The growth of money supply is correlated with the high inflation episodes because money growth is often in excess of real industrial growth. The failure of the monetary policy to curb price instability has caused growth instability as Nigeria’s record of growth and development has been very poor.

In Nigeria’s history, the monetary control framework seems to have failed to achieve the set monetary targets as their implementation became less effective with time. The rigidly controlled interest rate regime and the non-harmonization of fiscal and monetary policies may have contributed immensely to the adverse effect of constraining growth of the money and capital markets. In the era of Structural

Adjustment Programme (SAP), instead of relying on direct control mechanism for monetary policy, a shift to market-oriented reform was introduced for effective mobilization of savings and efficient resource allocation. Open market operation was the main instrument of the market-based framework. In Nigeria, beginning mid 1980s, monetary policy has been based on a medium-term perspective framework until recently. The shift to the market oriented reform through the open market instrument was to free monetary policy implementation from the problem of time inconsistency and minimize over-reaction due to temporary shocks. Policies have ranged from targeting monetary aggregates to monitoring and manipulating policy rates to steer the interbank rates and by extension other market rates in the desired direction (Uchendu, 2009). The extent to which these strategies have helped to stabilize the economy and encourage growth is of immense concern to policy makers and academics.

In the light of the above therefore, this study intends to subject these issues to empirical examination in order to evaluate the effect of money supply on economic growth in Nigeria.

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:

  1. To examine the trends of money supply and economic growth in Nigeria from 1980 to       
  • To establish the possibility of existence of a long-run relationship between money supply and economic growth in
  • To evaluate the effect of money supply on economic growth in

 

The questions which will guide the study include:

  • What is the trend of money supply on economic growth in between 1980-2018?
  • Is there a long-run relationship between money supply and economic growth in Nigeria?
  • Is there any significant effect of money supply on economic growth in Nigeria?

STATEMENT OF HYPOTHESIS

To proffer useful answers to the research questions and realize the study objectives, the following null hypotheses were formulated:

Ho 1:   There is no long-run relationship between money supply and economic growth in Nigeria.

Ho2:   Money supply has no significant effect on economic growth in Nigeria.

SIGNIFICANCE OF THE STUDY

The project will be significant in the following ways;

  1. It would provide an objective view on the effectiveness of money supply as a monetary policy tool in
  2. It would improve the existing knowledge on the effect of money supply on economic By breaking new grounds in the subject matter.
  3. It would provide policy recommendation to policy makers on the ways to make Nigeria’s economy vibrant through the effective use of money

SCOPE OF THE STUDY

This study covers a period of 39 years ranging from 1980 to 2018. The data and information used for this project were sourced from the CBN statistical bulletin and World Development Indicators (WDI). The choice of this period is to ascertain the effect of money supply on the Nigerian economy given the different economic cycles that have been experienced within this period. This study incorporates real gross domestic product growth rate as the dependent variable and broad money supply, inflation, exchange rate to capture the external sector, total government expenditure to capture the fiscal sector, labour force participation to capture the real sector and interest rate as the independent variables to examine the effect of money supply on economic growth in Nigeria within this period.

ORGANISATION OF THE STUDY

This study is organized in five distinct chapters. The first chapter being the introduction; background to the study, statement of the problem, objectives of the study, research questions, research hypothesis, scope of the study, significance of the study, and organisation of the study. Chapter 2 reviews the related literature, the conceptual, empirical and theoretical review. Chapter 3 contains the methodology of the research; model specification and estimation techniques which are used in arriving at the research results. Sequel to that, chapter 4 consists of data presentation, analysis and interpretation of results. While chapter 5 is the summary, recommendations and conclusion of the research work.

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