The Money Supply and Inflation Rate in Nigeria (1985- 2024)

Abstract

This study focused on money supply and inflation rate in Nigeria for the period 1985 to 2024. The specific objectives were to empirically examine the impact of broad money supply (M2) on the rate of inflation in Nigeria, examine the impact of nominal money supply (M1) on the rate of inflation in Nigeria, and to empirically examine the impact of interest rate on the rate of inflation in Nigeria, The study adopted ex post facto method and employed the Generalized Method of Moments (GMM) techniques to analyze the data. The findings showed that Broad money supply (M2) has significant positive impact on the rate of inflation in Nigeria; Nominal money supply (M1) has significant positive impact on the rate of inflation in Nigeria, while monetary policy rate has significant negative impact on the rate of inflation in Nigeria. Based on the findings, the study recommended that the Central Bank of Nigeria (CBN) should prioritize tightening liquidity management. This involves controlling the rate at which broad money expands, possibly through increased Cash Reserve Ratios (CRR) for banks and selling government securities; given its significant positive impact, the CBN must restrain the growth of the overall nominal money in circulation. This underscores the need to minimize reliance on "Ways and Means" advances to the government, which directly injects high-powered money; and the negative impact of MPR on inflation means the CBN should continue to leverage it. Raising the MPR is an effective tool to dampen inflationary pressures by increasing borrowing costs and reducing aggregate demand.