Journal of Management

Information and Decision

Sciences (Print ISSN: 1524-7252; Online
ISSN: 1532-5806)

Research Article: 2022 Vol: 25 Issue: 4S

The Impact of Money

Supply on Economic
Growth in Nigeria
Omankhanlen Alexander Ehimare, Covenant
University Ota

Samuel-Hope Divine Chinyere, Covenant

University Ota

Ehikioya Benjamin, Covenant University Ota

Citation Information: Omankhanlen, A.E, Samuell-

Hope, D.C., & Ehikioya, B.I. (2022). The impact of
money supply on economic growth in Nigeria.
Journal of Management Information and Decision
Sciences, 25(S4), 1-14.

Keywords
Money Supply, Broad Money, Economic Growth,
Development, Economy

Abstract
This study investigated effect of money supply
on economic growth in Nigeria between 1990
and 2018. There has been a certain relationship
between the stock of money and economic
development or economic activity in Nigeria
since 1980. Over the years, Nigeria has been
managing its economy by changing its stock of
capital. As a result of the 1981 oil price crash
and the balance of payment (BOP) deficit
experienced during that time various
stabilization strategies have been used, ranging
from fiscal to monetary policy. The data used
here are the annual time series data of the
related variables, which are primarily secondary
and taken from the CBN Statistical Bulletin,
while the Autoregressive Distributed Lag data
was adopted. Before we proceed to the
estimation proper for the Autoregressive
distributed lag (ARDL) regression model, it is
important that we verify if they are jointly co-
integrated or not. That is, if there exist a long
relationship between the series in the model. In
other to verify this, a bound co-integration is
applied. This is followed by the Error Correction
Model. The empirical results show that money
supply components jointly enhance economic
growth while the individuality of money supply
indicators depicts different consequences. Broad
money supply indicates positivity, yet weak
significant to determine the economic growth in
Nigeria. However, credit to the private sector is
inversely and statistically significant to
determine the economic growth in Nigeria.
Inflation rate and interest rate both have inverse
effect. Several policy implications can be drawn
from this study. The government, in formulating
monetary policy, must be aware of the fact that
the economic growth responds more favorably
to an increase in the money supply. The
government must also be conscious of the
relationship between the interest rate and credit
to private sectors and the purpose in enhancing
economic growth. Therefore, the study
recommends that the Central Bank of Nigeria,
should try to understand the role of money
supply in enhancing economic growth and come
up with monetary policies that will enable
money supply to drive the economy properly in
order to achieve economic growth.

Introduction
In recent years, the relationship between money
supply and economic growth has received growing
attention than any other topic in the monetary
economy. Economists disagree on the effects of
money supply on economic development. Although
some accepted that fluctuations in the quantity of
money are the most significant determinants of
economic growth and that countries that spend
more time observing the actions of aggregate
money supply undergo a great deal of variance in
their economic activities, others were skeptical
about the role of money in gross national income
(Robinson 1950, 1952). Evidence has shown that
there has been a certain relationship between the
stock of money and economic development or
economic activity in Nigeria since 1980. Over the
years, Nigeria has been managing its economy by
changing its stock of capital. As a result of the 1981
oil price crash and the Balance Of Payment (BOP)
deficit experienced during that time various
stabilization strategies have been used, ranging
from fiscal to monetary policy. As described above,
money supply has a considerable impact on
economic activity in both developed and emerging
economies. The low supply of monetary aggregates
in general and of money stock in particular was
responsible for the fundamental inability of many
African countries to achieve growth and
development. Several analysts have blamed the
government and its agencies for the inability of
monetary policies to translate into economic growth
as a result of inadequate execution and sincerity on
the part of policy makers.

When we address the idea of money supply and its

effects, two other problems frequently come to our
mind, namely the state of inflationary pressure and
the rate of unemployment. According to the
monetarist, the rise in money supply in the economy
triggers an increase in the general price of goods,
which causes inflation in the country (Tejvan, 2017).
The issue of unemployment, which is the primary
objective of any economy to generate as many
goods and services as possible while maintaining a
reasonable degree of price stability, is also
connected to the issue of inflation, but this major
objective would be very difficult to accomplish at a
high rate of inflation and price volatility due to
excess money supply in the economy. Accordingly,
this research work will investigate the technicalities
involved in the regulation of the money supply in
Nigeria.

Statement of problem
The main problem that has sorted out this work is
recurrence. It is widely assumed that a continuous
annual rate of money increase would adversely
affect the rate of price levels that will lead directly
to inflation, and can deny the anticipated impact of
the monetary policy measure on economic growth.
Recently, these inflationary pressures have led to a
devaluation of Nigeria's value as a result of
Expanding money supply initiatives. Money is more
closely linked to the aggregate level of investment,
costs, revenue, output and employment than any
other single economic variable. Excessive supply of
money resulting in excess demand for goods and
services, in return, leads to a rise in price and
deterioration in the balance of payment situation.
Usually, in a time of high inflation, the investor's
horizon is very short, and resources are redirected
from long-term investment to those with immediate
returns and inflation hedges, including real estate
and currency speculation. In the light of the above,
all industrial economies now see monetary
management as an integral part of their obligations.

Also a recent review of the manufacturing sector

indicated that the sector has been performing
below expectation, contributing only about 4% of
the Gross Domestic Product (GDP) in Nigeria. This
has resulted in a decline in industrial productivity.
Financial sector growth should, conventionally,
translate into economic growth, by making funds
available for investment which in turn will trigger
productivity in the manufacturing sector but the
reverse is the case as the total loans granted by
Nigeria banks to the private sector declined by
N600.60 billion from N16 trillion in the first quarter
of 2017 to N15.34 trillion, in the second quarter of
2018.

There is a consensus among researchers and

development experts that money supply input is a
catalyst for economic growth and development. The
combination of factor inputs to produce the desired
growth is contentious. This is the course of the
causality of the interplay of the factor.

Inputs to economic growth are an ongoing debate,

particularly in an emerging volatile economy such as
Nigeria. Money supply does not encourage
economic growth in isolation through factor inputs
such as the labor force of the financial system,
which is likely to calculate the desired growth.

Research Questions

In assessing this study’s topic, these research

inquisitions were projected:

1. What is the magnitude of money supply impact on

economic growth?

2. To what level has credit to private sector

impacted economic growth?

3. How does real interest rate influence the Nigerian

economic growth level?

4. To what extent has the inflation rate impacted

economic growth in Nigeria?

Objective of the Study

The study's main objective is to empirically analyze

the magnitude of Nigeria 'smoney supply and its
effect on the Nigerian economy. This research aims
primarily to:

1. To investigate the influence of the money supply

on economic growth.

2. To evaluate the impact of credit to the private

sector on economic growth.

3. To analyze the impact of real interest rate on

Nigeria’s economic growth levels.

4. To analyze the impact of inflation on Nigeria's

economic growth.

Research Hypotheses

This study will examine the relationship between

money supply and Nigerian economic growth. The
hypotheses of the study are presented in the null
form as shown below.

Hypothesis One

H1: Money supply to GDP (proxy for economic

growth) does not have significant impact on
economic. growth in Nigeria.

Hypothesis Two

H2: Credit to the private sector does not have a

significant effect on Economic growth in Nigeria.

Hypothesis Three

H3: real interest rate does not have significant

influence on economic growth in Nigeria.

Hypothesis Four

H4: inflation rate does not have a significant impact

on economic growth in Nigeria.

Review of related literature

Conceptual Framework

Broad Money Supply (M2)

The broad money supply is a measure of the

quantity of money consisting of M1, plus savings &
small time deposits, overnight commercial bank
deposits, plus non-institutional money market
accounts (CBN, 2018). According to Omodero,
(2019) Money supply is a monetary policy
instrument that is extremely important to improve a
nation's economic development. All M2 components
are very liquid, and the non-cash components can
very easily be converted into cash. Broad money
includes notes & coins, with saving accounts &
deposits also included. Treasury Bills & gilts can
also be included. These securities are considered to
be 'near money.'

Broad money (M2) in economics is a measure of the

money supply that involves more than just physical
money, including currency and coins (also known as
narrow money). It usually includes commercial bank
demand deposits, and any money kept in easily
accessible accounts. Broad money may have
different meanings depending on the user situation,
and typically it is designed as required to be the
most useful indicator in the situation. More
specifically, broad money is only a term for
consideration of the least liquid money type, and
less of a defined meaning in all cases. Broad
(percentage of GDP) in Nigeria as of 2018 was
23.53. Its highest value over the past 58 years was
28.63 in 1980, while its lowest value was 9.06 in
1996.

Credit to the Private Sector (CPS)

The task of the financial intermediation is generally

carried out by the financial sector, channeling
capital to profitable investment. In particular,
deposit-taking institutions are well-recognized for
fulfilling the crucial role of sourcing finance in
supporting Nigeria's private sector consumption
and investment. According to Olowofeso, Adeleke &
Udoji, (2015) Private sector credit applies to
financial capital made available to the private sector.
Financial enterprise, such as loans and advances,
sales of non-equity securities, transaction credits
and other receivable accounts, which compensate
for claims for repayments. Credit can be seen from
two angles, in this regard; namely: Credit for
commercial or business loans and the banking
system. Bialek-jorwoska & Nehrebecka, (2016),
opined that trade credit applies to transactions
involving the supply of products by the seller or the
production of a service without immediate payment.
While Private sector banking system credit, includes
the direct provision of loans and overdrafts to the
private sector by institutions such as deposit money
banks, non-interest banks and Nigerian merchant
banks.

Economic Growth

Economic growth is understood, as a dynamic

mechanism in which each economy creates
relationships between the different production
factors that, following economic policies, allow the
production of a greater quantity of goods and
services produced, thereby improving the well-
being of the population (Gallardo et al., 2019).
Economic development requires more demand
which implies an increase in output per unit of input,
not only inputs but also greater efficiency.

Economic growth is an important prerequisite for

sustainable development.

Real Interest Rate

Interest rate plays an important role in economics,

particularly in monetary theory. It may therefore
come as a surprise that a consensus has not yet
formed as to the existence and determinants of the
interest rate.Trading Economics, (2020) states that
real interest rate is the lending interest rate adjusted
for inflation as measured by the GDP deflator. The
terms and conditions attached to lending rates
differ by country, however, limiting their
comparability.

Real interest rate (%) in Nigeria was reported at

4.5222 % in 2019, (World Bank, 2020).

Theoretical Framework

The definition of money and changes in money

stock are important aggregates that have far-
reaching consequences for the formulation of
economic policy. Changes in money stock have a
profound impact on the pattern of international ties
and form the basis for the articulation of the steps
required to ensure the overall economic output of
any country.

Basically this theory adopts an eclectic approach,

which means that this research is not pinned to a
particular theory but it adopts various theories
which include:

i. Classical quantity theory

ii. Keynesian theory and

iii. Monetarist theory

Classical Quantity Theory

The classical theory of money, in its original and

crude form, suggests that there is a direct and
proportionate relationship between increases in the
quantity of money and the general price level. The
wording of this crude principle indicates that if
money supply rises by 10%, then general prices will
also grow by 10%. This wording is also attributed to
the writings of the French economist-Jean Bodin
published around 1968. Later in 1952, David Hume
provided a better picture of the quantity theory of
money as cited in Nzotta (2004). The crude
hypothesis may be put forward as follows:

P = KM Where P = General price index

K = Constant Proportionality,

M = Money supply

Where K = v/y V = Velocity of money; Y = real output

Keynesian Monetary Theory

Keynes based his theory on the following

assumptions.

1) As long as there is unemployment, all factors of

production are in a perfectly elastic supply state.

2) The unemployed factors are homogenous,

perfectly divisible and interchangeable.

3) As long as prices do not rise or fall as output

changes, there will be constant returns to scales

4) Finally, as long as there are unemployed

resources, effective demand and the quantity of
money change in the same direction (Jhingan,
1990). Keynesians have done a great job in
promoting their set of ideas. Rather than treat
monetary theory in two separate compartments as
the classical do, they integrate monetary theory
with value theory. Apostles of Keynes do not buy
the classical notion that the relationship between
money and prices is direct and proportional. They
share the view that it is indirect through the rate of
interest.

Monetarist theory

In 1956, Professor Milton Friedman presented a

"restatement of the quantity theory" in modern
terms. This resulted in a new and more
sophisticated version of the quantity theory and in a
manner amenable to empirical testing. Friedman's
concern was to show that velocity (or demand for
money) was a stable function of a limited number of
other important variables, i.e. that velocity bears a
stable, predictable relationship to limited number of
other important variables. His approach was to
concentrate on the determinants of how much
money people will hold rather than the motives for
holding more. Monetarism consists of the school of
thought that the demand for money is a stable
function of many variables and that money supply is
the most important determinant of interest rate,
incomes (output), employment and prices
(Woods,1980). The monetarists contend that all
changes in money income can be traced to changes
in the supply or demand for money (Odumusor,
2015).

The major tenets of monetarism could be stated as

follows:

a) Money supply has a direct and significant impact

on national income and expenditure.

b) Interest rates have no effect on the supply and

demand for money. The demand for money is the
transactions demand for money, which is
determined by the level of income.

c) Change in the general price level is essentially a

monetary phenomenon and exogenously determine
by the monetary authorities.

Empirical Review

Bashir & Sam-Siso (2020) investigated the

relationship between monetary policy and
macroeconomic performance in Nigeria during
1981-2018. The stochastic properties of the time
series data were examined using both conventional
and unit root tests with structural breaks to account
for shift dummy in the series. Their results indicates
that the series are combination of both I(0) and I(1)
in the same specification which prompted the use of
ARDL. The results revealed that in the short run, lag
value of inflation rate, exchange rate appreciation
and unexpected appreciation (i.e., shift_dummy)
could reduce inflation rate while lower MPR and high
volume of money in circulation could stimulate
inflation rate. Also, lag value of unemployment rate,
high MPR and exchange rate depreciation
significantly stimulate unemployment rate while
unexpected appreciation reduce it.

Onwuteaka, Okoye & Molokwu (2019) Examined the

impact of monetary policy on economic growth in
Nigeria using secondary data from the Central Bank
of Nigeria statistical bulletin covering the period
1980-2017. Estimates of the model were calculated Get the App
using a multiple econometric model of the ordinary
least square to determine the impact of money
supply, credit in the economy, interest rate on
!
credit, infrastructure, inflation rate, external debt,
price index on Nigerian development. The findings
show that money supply, interest rate on credit,
infrastructure and external debt have been
statistically important in explaining its effect on
economic development, while other variables used
in the analysis have all been found to be statistically
insignificant in explaining the growth rate of the
Nigerian economy.

Ayodeji & Oluwole (2018) analyzed the effect of

monetary policy on economic growth in Nigeria by
developing a model capable of investigating how
government monetary policy has influenced
economic growth through a multi-variable
regression study. Error Correction Model has been
implemented in order to provide a parsimonious
model. As a result, two variables (money supply and
exchange rate) had a positive but relatively
negligible effect on economic development.

Ufoeze, Odimgbe, Ezeabalisi & Alajekwu (2018)

investigated the impact of monetary policy on
economic growth in Nigeria by using natural GDP
logs as dependent variables against explanatory
monetary policy variables: monetary policy rate,
money supply, exchange rate, lending rate and
market-controlled investment for the period 1986 to
2016. The research followed the Ordinary Least
Squared technique and also carried out root and co-
integration tests for the unit. The analysis showed
that there is a long-term relationship between the
variables. Moreover the key results of this study
have shown that monetary policy rates, interest
rates and investment have a substantial positive
impact on Nigeria's economic development. Srithilat
& Sun (2017) looked at the effect of monetary policy
on economic growth using annual time series data
from 1989 to 2016. Error Correction Model was
used to evaluate the relationship between variables.
The result shows that money supply, interest rate
and inflation rate negatively affect real GDP per
capita over the long term, and only the real
exchange rate has a positive impact. The effect of
the error correction model suggests the presence of
a short-term causality between money supply, real
exchange rate and real GDP per capita.

Yien, et al., (2017) examined the dynamic

relationship between monetary policy and economic
growth for Malaysia during 1980-2015, using VAR
Granger Causality method. They observed that
interest rate granger caused growth per capita,
money supply, inflation, unemployment and foreign
direct investment. More so, the study demonstrates
that changing monetary policy approach in Malaysia
from monetary targeting to interest rates targeting
is a fruitful policy implementation. Finally, their
results showed bidirectional causality between
unemployment and growth per capita in Malaysia.

On the link between unemployment and monetary

policy, Essien, et al., (2016) employed a Vector
Autoregressive (VAR) framework for the period
1983q1–2014q1. In their analysis, the authors
incorporated the effect of structural breakpoints
into the VAR model as dummy variables. Their
findings showed that a positive shock to policy rate
raises unemployment over a 10 quarter period.
Towards achieving inclusive growth in Nigeria,
Nwosa (2016) employed OLS technique to examine
the effect of monetary, fiscal and foreign exchange
policy) on unemployment and poverty rates for the
period 1980- 2013. The analysis shows that
unemployment rate is mainly influenced by
exchange rate (monetary policy) while poverty rate
is influenced by fiscal policy.

Methodology
The connectivity between money supply and
economic development in Nigeria was explored in
this part of the study. The former was interpreted as
the ratio of money supply to GDP, the ratio of
private credit to GDP, the inflation rate and the real
interest rate. The data used here are the annual
time series data of the related variables, which are
primarily secondary and taken from the CBN
Statistical Bulletin, while the Autoregressive
Distributed Lag data was adopted.

Model Specification

Where

RGDP = Real Gross Domestic Product

M2 = Money Supply

CPS = credit to private sector,

INF= Inflation rate

RINT= Real Interest Rate

In econometric form:

The model following a semi-log linear model due to

high higher series of RGDP and MKTCAPO. The
structured model is presented below:

Were L is the Logarithm

The Autoregressive Distributed Lag (ARDL) model

for the study is modelled below:

Where Δ is the first difference of operator.

Results and discussion

In an attempt to verify the stationarity of variables,
Augmented Dickey Fuller (ADF) tstatistics was
employed to be sure of non-existence of second-
differenced variable which makes bound tests result
unreliable, since they are based on the criteria of
stationarity at level and/or at first difference. Table
1 shows the result of ADF test. Variable-stationarity
is stationary when ADF t-stat is above its critical
values at 5% significance. It is non stationary when
ADF t-stat is below critical values at 5%
significance.

Table 1
Augmented Dickey–Fuller (ADF) unit root

First Critical Order of

Variable Level Difference Value Lag Integration

LRGDP -4.598887 -2.967767 2 I (0)

LCPS -0.464730 -4.522678*** -2.967767 2 I (1)

INF -2.027583 -4.358594*** -2.967767 2 I (1)

LMS -3.412437 -2.967767 2 I (0)

RINT -5.325035 -2.967767 2 I(0)

Source: Author’s Computation

(2020),Where:*, **, & *** implies 10%, 5% &
1% significance level

ADF unit root test shows that the model’s variables

are I(0) and I(1), thus, the usage of Autoregressive
Distributed Lag is being justified.

Unit Root test

Table 1presents the Augmented Dickey-Fuller (ADF)

unit root test. The unit root test was presented
inform of intercept model in other to deduce the
order of integration of the variables at 5% level of
significant. According to the results, LRGDP, LMS
and RINT are integrated of order zero. That is the
series (LRGDP, LMS and RINT) does not have unit
root problem at level. However, both LCPS and INF
have unit root problem at level, but after the first
difference, the series becomes stationary. Hence
both LCPS and INF is integrated of order one. In
summary, there is mixed stationary series in the
model, therefore the auto regressive distributed lag
model is applicable.

Bound Test for Cointegration

Before we proceed to the estimation proper for the

Autoregressive distributed lag (ARDL) regression
model, it is important that we verify if they are
jointly co-integrated or not. That is, if there exist a
long relationship between the series in the model. In
other to verify this, a bound co-integration by
Pesaran & Shin (1999); Pesaran et al., (2001) is
applied.

The results of the bound testing for co-integration

of money supply and economic growth is presented
in table 2. The bound test compares the F-value of
a model at 5% level with the lower bound test and
upper bound test at 5% significant level. The model
F-statistics value of 4.385045 showed that the
value is greater than both the lower and upper
bound value of 2.86 and 4.01 respectively at 5%
significant level. The result showed that there exists
a long run relationship among the financial
development and economic growth. This implies
that the null hypothesis of no co-integration among
the money supply and economic growth in Nigeria
cannot be accepted. This means that the alternative
hypotheses of co-integration among the variables
are supported.

Table 2
Bound test for co-integration test

Lower Upper
F-statistic K Bound bound

4.385045*** 4 10% 2.45 3.52

5% 2.86 4.01

2.5% 3.25 4.49

1% 3.74 5.06

Source: Author’s Computation

(2020),Where:*, **, & *** implies 10%, 5% &
1% significance level

The Error Correction Model result in Table 3 shows

that about 9.77% percent represents the speed at
which the independent variables adjust annually.
The co-efficient of the Error Correction Model
which is -0.097731confirmed with theoretical
exposition of the Error correction modelling with the
negative value and corresponding Probability Value
of 0.0349, that is, the ECM is significant at 5%
significance level. Short run Inflation is statistically
significant at 5% level as the coefficient denotes
-0.000822 t-statistics denotes -2.2157 and the p-
values of 0.0452 is less than 0.05. A percent
increase in the short run of INF will yield about 0.08
percent decrease in LRGDP.

Table 3
Estimated coefficients of the short run and error
correction model

Stand. T- P–