Abstract
The study provides an empirical test of the Polak model using annual time series data from Nigeria for a sampling period of 1985 to 2011. The Johansen and Jesulius multivariate cointegration procedures are particularly employed to investigate the long-run relationship between money supply and other selected macro-economic variables; our findings show convincing evidence in support of long-run equilibrium relationship existing in these variables. Also, the Granger Causality Test is employed to examine the causality between money and the selected macroeconomic variables; in all, the findings reveal bidirectional causality between money and core macro-economic variables such as national income, net foreign domestic credit and export in Nigeria. The study also finds that the marginal propensity to import is 20 percent, while the marginal velocity of money in circulation is very high almost approaching 300 percent suggesting that the Nigerian economy is inflationary.
Highlights
It is no longer an intuition for one to express a concern regarding the tempo at which money circulates from one hand to another in Nigeria
The results reported in table 6b show that at 5 percent critical value for F-Statistic, the null hypothesis that there is no causality between capital movement and money supply, export and capital movement, between net foreign asset and capital movement is not rejected meaning that there is zero causality in each of these pairs
It is discovered that the marginal propensity to import is about 21 percent but the positive effects of this are underscored by the illegal or illicit activities of smugglers
Summary
It is no longer an intuition for one to express a concern regarding the tempo at which money circulates from one hand to another in Nigeria. Year-on year government, corporate institutions and individuals increase their expenditure. Consequence upon this is the usual increase in the stock of money in circulation. The speed of this circulation varies over time depending on the supply of money. An increase in money supply has the tendency to raise the tempo (i.e. the velocity) at which money circulates. It was alleged that when the velocity of money raises all other things being equal, the purchasing power declines (i.e. prices of goods and services rise). The velocity of money in circulation can induce inflation when it is high or deflation when it is low. Velocity appears to be an important determinant of the value of money in an economy
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