MONEY SUPPLY, INFLATION AND NIGERIA’S ECONOMIC GROWTH (1980 -1995)

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MONEY SUPPLY, INFLATION AND NIGERIA’S ECONOMIC GROWTH (1980 -1995)

Abstract:

Price stability and economic growth are two complementary phenomena Macro-economic stability must be sustained in order to achieve a sustainable economic growth. This implies that aggregate demand must be consistent with the absorptive capacity of the economy. However, experience in Nigeria has shown that fiscal policies intended primarily to stimulate economic growth has been a source of macro-economic instability. Deficit budgets financed primarily by the banking sector have been a major source of financial imbalances. The resultant high inflation has powerful allocative and distributional effects on consumers and investors, which are often detrimental to this growth process. Consequently, the decision of maintaining monetary stability is a difficult one because of the uneasy trade-offs. The Federal Government has become increasingly dependent upon bank advances to pay wages and salaries and other material bills. Economic upsurging is, therefore, associated with an expansion of credit, the downsurging with a contraction. The main objective of this thesis is to replicate tests identifying the line of causality between the money supply and the rate of inflation using Nigerian data and to show the implication of this causation of the growth of Nigeria economy between the period 1980-1995. The methodology adopted is that of Granger and the results show that there is a strong relationship between the money supply and inflation with the line of causation being bi-directional, that is, from the money supply to inflation and vice versa. Although such a bi-directional relationship exist only for present values of the money supply and not for lag values. The effect of the causal relationship between the money supply and the rate of inflation on the growth of the gross domestic product is, however, not significant.

MONEY SUPPLY, INFLATION AND NIGERIA’S ECONOMIC GROWTH (1980 -1995)

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