The Relationship between Rate of M1 and Inflation- Evidence from a Regression Analysis (1990-2016)

Abstract

The paper evaluates the relationship between rates of M1 which is generally known as the narrow definition of money in Nigeria, over the period 1990q1 to 2016q2, using Ordinary least square (OLS) technique, and the Correlation result conducted showed that, the rate of M1 and inflation rate has a strong positive relationship with a coefficient of 98%. The regression result showed that, there exists a significant positive impact of the rate of M1 on inflation rate in Nigeria, which is significant at 1% level of significance showing that a unit change in M1 will significantly increase INFLATION RATE by 5.2%. Therefore, the paper recommends that, that the government should effectively control the amount of money supplied in form of coins and naira notes to the economy in order not to increase inflation, and also it is tentative for monetary authority to note that money supply (m1) could be used to regulate the level of inflation in the economy.