Revalidation of the impact of growth in Money Supply on Inflation in Nigeria
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Abstract
This study examines the impact of money supply on inflation in Nigeria, using quarterly data series from 1980 – 2023. The Johansen cointegration approach, Autoregressive Distributed Lag (ARDL), and Granger causality test are used to identify the long-run relationship, the short-run dynamic, transmission lag, and causal relationship among the variables respectively. The variables considered are inflation, broad money supply, and real GDP. The regression results suggest that money supply has a significant impact on inflation in the short and long run. However, money supply has a higher impact in the long run compared with the short run. The result remained consistent with the classical Quantity theory of money and the monetarist hypothesis on inflation. Furthermore, the study confirmed that in the long run, the money supply growth significantly and positively impacts inflation. Moreover, the causality test result reveals that money supply growth has a unidirectional causal relationship with inflation, and the causal relationship runs from money supply growth to inflation. By implication, the monetary authority can manage the money supply to affect the level of the level of general prices (inflation).
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