Impact of money supply onexchange rate in Nigeria: (1980-2011)

Abstract

The paper examines the impact of money supply in determining the exchange rate of the currency with respect to fixed and flexible exchange rate policies in Nigeria. Time series data, sourced from Central Bank of Nigeria (CBN) was used. Money supply (MS) was decomposed to include Narrow Money Supply (M1), quasi money (Qm) and Broad Money Supply (M2). Econometric analysis based on the least squares procedure was conducted using E-View Version 7. Descriptive analysis was also carried out. It was found from the study that periods of floating exchange rate policy have influenced exchange rate positively even to a great extent and that quasi money showed a negative and significant sign on exchange rate, while narrow money exhibits a positive sign. Broad money supply indicates that expansionary monetary policy tends to diminish the Naira/ Dollar value. It is therefore recommended among others, that the Nigerian financial market in general and money market in particular should be strengthened in both depth and breath. The available money outside the banking system should be properly channelled for productive purposes in order to achieve the desired stability in the naira exchange rate and by extension growth in the Nigerian economy.