Abstract
The study examines money supply and inflation rate in Nigeria. Secondary data that ranged between 1970-2008 were sourced from the CBN Statistical Bulletin. The study used Vector Auto Regressive (VAR) model. The stationary properties of the model were also explored. The results revealed that money supply and exchange rate were stationary at the level while oil revenue and interest rate were stationary at the first difference. Results from the causality test indicate that there exists a unidirectional causality between money supply and inflation rate as well as interest rate and inflation rate. The causality test runs from money supply to inflation, from the interest rate to inflation and from interest rate to money supply. The paper concludes that government should use the level of inflation as an operational guide in measuring the effectiveness of its monetary policy.
Highlights
One of the macroeconomic challenges facing Nigeria governments in economic history has been the maintenance of price stability
The causality test runs from money supply to inflation, from the interest rate to inflation and from interest rate to money supply
The result from the causality test indicates that there exists a unidirectional causality between exchange rate and inflation rate, interest rate and inflation rate
Summary
One of the macroeconomic challenges facing Nigeria governments in economic history has been the maintenance of price stability. The signs closely associated with these shocks are huge balance of payment deficits, high rates of inflation, declining domestic savings, growing government expenditure, falling agricultural production, decreased utilization of industrial capacity, poor transportation infrastructure, and poor levels of social services. All these problems were financed through proceeds of the oil boom which resulted in increases in money supply and the subsequent effects on the economy through high general price levels. To be able to answer these questions, the study sets out to analyse the effect(s) of increase in money supply on inflation in Nigeria. The rest of the paper is organized as follows: Section 2 presents review of literature, Section 3 contains methodology, Section 4 presents result and Section 5 provides policy implication and conclusion
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