Impact Of Money Supply On Economic Growth
Money supply, an essential component of monetary policy, plays a crucial role in influencing economic growth through its multifarious effects on various sectors of the economy. An expansion in the money supply can stimulate economic activity by lowering interest rates, thereby encouraging borrowing and investment, which in turn spurs consumption and production. This injection of liquidity can also facilitate increased spending on goods and services, fostering demand-side growth. Moreover, a sufficient money supply ensures adequate liquidity in financial markets, supporting the efficient allocation of capital and reducing transaction costs. However, an excessive increase in money supply may lead to inflationary pressures, eroding the purchasing power of currency and potentially destabilizing the economy. Therefore, maintaining an optimal balance in money supply growth is imperative for sustainable economic expansion, as it promotes stability and fosters conducive conditions for long-term growth, productivity, and prosperity.
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.
Cover Page
Title Page
Approval Page
Dedication
Acknowledgment
Abstract
Table Of Contents
CHAPTER ONE:
1.0 INTRODUCTION
1.1 Background To The Study
1.2 Statement Of Problem
1.3 Objective Of The Study
1.4 Research Hypothesis
1.5 Significance Of Study
1.6 Scope And Limitation Of Study
CHAPTER TWO:
2.0 LITERATURE REVIEW
2.1 Review Of Theoretical Literature
2.2 Review Of Empirical Literature
2.3 Why Is Money Supply Important
2.4 Meaning Of Monetary Policy
2.5 Objectives Of Monetary Policy
2.6 Monetary Policy Formulation In Nigeria
2.7 Determinants Of Money Supply In Nigeria
2.8 Monetary Policy In Nigeria
2.9 Factors That Have Militated Against The Effectiveness Of Monetary Policy In Nigeria
2.10 Nigeria Financial Institutions
2.11 Objectives Of Nigerian Financial Institutions
2.12 Significant Developments In The Nigerian Financial Institutions
2.13 The Impacts Of Money Supply In Nigeria Economy
2.14 Control Of Money Supply In Nigeria
CHAPTER THREE
3.0 RESEARCH DESIGN AND METHODOLOGY
3.1 Introduction
3.2 Model Specification
3.3 Estimation Procedure
3.4 Method Of Evaluation
3.5 Data Required And Sources
CHAPTER FOUR
4.0 PRESENTATION AND ANALYSIS OF RESULT
4.1 Presentation Of Result
4.2. Analysis Based On Statistical Criteria (1st Order Test)
4.3 Econometric Test Or 2nd Order Test
4.4 Evaluation Of Working Hypothesis
CHAPTER FIVE
5.0 SUMMARY, CONCLUSION AND POLICY RECOMMENDATION
5.1 Summary Of Finding
5.2 Policy Recommendation
5.3 Conclusion
Bibliography
Appendix
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.
Impact Of Money Supply On Economic Growth:
The relationship between money supply and economic growth is a complex and debated topic in economics. Economists have different views on the extent and nature of this relationship, and it can vary depending on the specific context and circumstances of an economy. Here are some of the key ways in which changes in money supply can impact economic growth:
- Monetary Policy and Interest Rates: Central banks control the money supply through their monetary policy tools, such as open market operations, reserve requirements, and interest rates. By adjusting the money supply, central banks aim to influence interest rates. When the central bank increases the money supply, it tends to lower interest rates, making borrowing cheaper for businesses and consumers. This can stimulate investment and consumption, which are key drivers of economic growth.
- Inflation: An increase in the money supply, if not matched by a corresponding increase in the supply of goods and services, can lead to inflation. Moderate inflation is generally considered healthy for an economy, as it can encourage spending and investment. However, high or hyperinflation can erode the purchasing power of money and disrupt economic stability, which can have negative effects on economic growth.
- Liquidity and Financial Stability: A stable and well-functioning financial system is essential for economic growth. An adequate money supply ensures that there is enough liquidity in the financial system to support transactions and prevent financial crises. Central banks often provide liquidity during times of financial stress to maintain stability.
- Exchange Rates: Changes in the money supply can influence exchange rates. An increase in the money supply, especially if it leads to lower interest rates, can lead to a depreciation of the currency, making exports more competitive and potentially boosting economic growth through increased export demand.
- Expectations and Confidence: Economic agents, such as consumers and businesses, pay attention to the actions of central banks and changes in the money supply. Their expectations about future monetary policy can influence their decisions to spend, invest, or save. Confidence in the stability of the currency and the central bank’s ability to control inflation is crucial for economic growth.
- Asset Prices: Changes in the money supply can also impact asset prices, such as stocks and real estate. Rapid increases in the money supply can lead to asset bubbles, which, when they burst, can have negative effects on the financial system and, consequently, on economic growth.
- Income Distribution: The impact of changes in the money supply on income distribution can also affect economic growth. Policies that lead to a significant increase in the money supply can benefit certain groups of individuals or businesses more than others, potentially exacerbating income inequality.
It’s important to note that the relationship between money supply and economic growth is not always straightforward, and there are many other factors at play in an economy. Additionally, the effectiveness of monetary policy in influencing economic growth can vary depending on the overall economic conditions and the degree of responsiveness of households and businesses to changes in interest rates and liquidity.
In summary, the impact of money supply on economic growth is a multifaceted and nuanced issue. Central banks and policymakers carefully monitor and adjust the money supply to achieve their economic objectives, which often include promoting stable and sustainable economic growth. However, the effectiveness of monetary policy in achieving these goals depends on various economic and financial factors.