The Nigerian economy has not fared as well as expected despite its rich human and natural endowments and its claim to be the ‘giant’ of Africa.  When compared with the emerging Asian economies, particularly, Thailand, Malaysia, China, India and Indonesia that were far behind Nigeria in terms of GDP per capita in 1970, these economies have been transformed and are not only miles ahead of Nigeria, but are also major players on the global economic arena.  Indeed, Nigeria’s poor economic performance, especially in the last forty years, is better illustrated when compared with China which now occupies an enviable position as the second largest economy in the world. In 1970, while Nigeria had a GDP per capita of US$233.35 and was ranked 88th in the world, China was ranked 114th with a GDP per capita of US$111.82 (Sanusi, 2010).  By 2013, Nigeria’s GDP per capita was US$1,555 as against China’s US$6,188 (World Bank, 2013).


Available data have variously put the percentage of the population falling below the poverty line in the country at 70% (Central Intelligence Agency [CIA], 2013) and 46% (World Bank, 2013).  The World Economic Forum ranks Nigeria among the poorest countries in the Global Competitive Index (GCI) 2013 -2014.  The country went down by five slots from the 115th position it occupied last year to 120th position presently, out of the total 148 countries on the list (Ibekwe, 2013).  Similarly, there has been rising unemployment with the 2013 level by the National Bureau of Statistics (NBS) put at 23.9% (Emejo, 2013). Moreso, the country lags behind its peers in most human development indicators. For example, Nigeria’s score of 24.2% in the 2008-2012 Global Hunger Index is much higher than those of China (3.4%), Thailand (9.0%), Indonesia (18.6%), Chile (0.5%), and Malaysia (12.7%) (International Food Policy Research Institute [IFPRI], 2013).

The poor economic performance of the country has been traced to a number of factors including political instability, lack of focused and visionary leadership, economic mismanagement and corruption (Sanusi, 2010). Economic management includes monetary policy management which is the concern of this paper. Monetary policy management involves management of money supply which is regarded as a powerful tool for controlling the economy. This paper wants to investigate the effects of money supply on the Nigerian economy.


The importance of money cannot be overemphasized.  Money has been linked to changes in economic variables that affect all of us and that are important to the health of the economy (Mishkin, 2007:8).  From inception, apart from helping man to overcome the cumbersome nature of barter, it has performed very useful functions.  Whether money is shells or rocks or gold or paper (Mushkin, 2007:50), it has performed four primary functions including serving as a medium of exchange, unit of account, standard for deferred payment, and store of value. Indeed, the introduction of money has greatly facilitated exchange.


The focus of this study is not on the functions of money, however, but on its influence on the economy.  To stress the point of the influence of money on the economy, Bromley (2006:13) wrote, “Money may not make the world go around, but it sure makes the economy go up and down.” Establishing the influence or otherwise of money, the channels, and the extent of its influence on the economy has been of great interest to economists over time.  It has also been an issue of great debate among economists.  Consequently, a number of theories have been formulated to explain the impact of money on the economy.  The debate is predominantly between the Monetarists and the Keynesian economists.  The two major theories of these contending groups respectively are the quantity theory of money (QTM) popularized by Irving Fisher and later Milton Friedman, and the liquidity preference theory propounded by John Maynard Keynes.  The bone of contention has been the role of money supply in determining the price level and total production of goods and services (aggregate output) in the economy.


The quantity theory of money was developed by the classical economists in the nineteenth and early twentieth centuries and deals with how the nominal value of aggregate income is determined.  It also tells how much money is held for a given amount of aggregate income; hence, it is also a theory of the demand for money.  The theory states that nominal income is determined solely by movements in the quantity of money (Mishkin, 2007).  Its contention is that changes in the quantity of money lead to equal changes in the price level in the long run and no changes in output.  The classical economists’ quantity theory of money acknowledges the medium of exchange and unit of account functions of money.


Keynes’s liquidity preference theory introduced the element of interest rate in the transmission mechanism.  It assumes that money changes will only affect output or prices through its effect on a set of conventional yields – the market interest rate of a small group of financial assets, such as government or corporate bonds.  A given change in the stock of money will have a calculable effect on these interest rates, and the interest rate changes are then used to derive the change in investment spending, the induced effects on income and consumption, and so forth (Fand, 1970).  Keynes’s theory not only acknowledges the medium of exchange and unit of account functions of money but also introduces the standard for differed payment and store of value functions (“Monetary policy: Transmission mechanism,” 2003).  (Details of these theories will be presented in the second chapter of this paper).


A steady stream of empirical research has been carried out on the subject of money and the economy worldwide.  Most of the work has been confined to the industrial countries, especially the United States and the United Kingdom.  Relatively fewer studies have been conducted on developing countries, though work has been increasing in recent years (Sriram, 1999).  In the last few decades, the important issue for economists, researchers and policy makers has been the study of the causal relationship between money supply, price, and output because such relationship reveals the appropriate monetary policy as well as its effectiveness (Mishra, Mishra, & Mishra, 2010).  There have been several empirical studies in many economies – both developed and developing – but the results have shown no consensus.  While some studies indicate a bi-directional causality between money, income, and prices, others show a uni-directional causal relationship between them.

For example, Ahmed (2002) investigated the issue of multivariate causality among money, interest rate, prices and output in selected South Asian Association for Regional Cooperation (SAARC) economies, namely, Bangladesh, India, and Pakistan. He conducted bivariate, multivariate, and block causality tests. The causality tests suggested that interest rate, though controversial in developing countries, deserved to be a good policy variable in Bangladesh and Pakistan while money deserved to be a good policy variable in India. A bi-directional causality existed between money and prices in Bangladesh and Pakistan leading, in turn, to an increase in money stock. The finding is in consonance with the view of real business cycle theorists who postulate that monetary changes only affect prices. His block causality tests also revealed that interest rate and money as a block caused output and price, but output and price did not cause interest rate and money in Bangladesh. The situation was, however, reversed in Pakistan and India.


Again, Muhd Zulkhibri (2007) did an empirical study on the causality relationship between monetary aggregates, output and prices in Malaysia using monthly data for the period 1979 – 2000. The study was based on a vector auto regression (VAR) model applying the granger no-causality procedure developed by Toda and Yamamoto (1995). The results indicated a two-way causality running between monetary aggregates, M2 and M3 and output which was consistent with theoretical views of Keynesian and Monetarists whereas there was a one-way causality running from monetary aggregate, M1 and output. Also, the results suggested that all monetary aggregates have a strong one-way causality running from money to prices and thus, lending empirical support to the argument that inflation is a monetary phenomenon.

In relation to Nigeria, most of the studies indicate a causal relationship from money to these variables implying that money supply has some influence in the Nigerian economy.  What is not agreeable among these studies is the extent or degree of influence of money supply on the economy.  While some show a stronger influence, others indicate a weaker influence. Studies on Nigeria include those by Omanukwue (2010), Chimobi and Uche (2010), Ogunmuyiwa and Ekone (2010), Nwafor, Nwakanma, Nkansah, and Thompson (2007), and Anoruo (2002)  Others include Kumar, Weber, and Fargher (2010), Omotor (2011),  and Chukwu, Agu, and Onah (2010). For instance, Chimobi and Uche (2010) found that money supply has a strong causal effect on price and output in the country. The results of the work by Nwafor, Nwakanma, Nkansah, and Thompson (2007) collaborated this finding and added that money supply also affects interest rates. On the other hand, the study by Omanukwue (2010) established the existence of ‘weakening’ uni-directional causality from money supply to core consumer prices in Nigeria. According to the paper, inflationary pressures were dampened by improvements in real output and financial sector development.



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