THE RELATIONSHIP BETWEEN MONEY SUPPLY, INFLATION AND ECONOMIC GROWTH IN NIGERIA (1980 – 2020)

Abu, Michael Maju (PhD) and Silas Idoko Abu
Volume 8 Issue 1

Abstract

The ability to control price increase as well as stimulating the economy for growth is a major concern for policy makers while inflation targeting has remained a principal objective of monetary authorities. The empirical relationship between inflation, money supply and economic growth remains a vital input for policy making. Although various studies have examined the relationships, this study differs in terms of methodology and scope. The main objectives of the study are; to estimate the empirical relationship between money supply, inflation and economic growth; to determine the lag length it takes for money supply and inflation to impact on economic growth and to examine the short and long-run relationship among the variables. Secondary data were collected for the period of the study from the Central Bank of Nigeria (CBN) statistical bulletin of various issues from 1980 – 2020. Ordinary least square technique, granger causality and augmented angle granger test as well as the general equilibrium were the econometric frameworks employed for the analysis in this study. It was found that inflation has negative relationship with economic growth and that money supply and inflation are positively related. In terms of the lag length, it was found that it is only after a period of two years that lower inflation rates would lead to the increase in economic growth. In general, inflation is harmful to economic growth in Nigeria. For the short and long-run relationships, it was found that there is co-integration in the long run relationship between Money supply and inflation in Nigeria going by the trace and Eigen-value statistics. Lastly, it was found that money supply and inflation have a long run equilibrium relationship. From the foregoing analysis, this study recommends that to accelerate economic growth with minimum inflation in Nigeria, money supply should be kept in check with the inflation targeting objective of the central bank. Keywords: Money Supply, Inflation, Economic Growth, Monetary, OLS

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