Impact of Money Supply on Inflation Rate in Nigeria

Abstract

This study aim to explain the relationship between the money supply and inflation rate in the Nigeria's economy. In order to contribute to a deeper understanding of the critical economic relationship between money supply and the country's inflation rate, this study sought to elucidate the impact of these fluctuations. The data utilized for this analysis consisted of annual time series data spanning from 1990 to 2022, sourced from the CBN Statistical Bulletin. The Autoregressive Distributed Lag (ARDL) model of analysis was employed. The empirical findings revealed that the various components of the money supply collectively contribute to the inflation rate, while the individual indicators of the money supply exhibit distinct consequences. Broad money supply and exchange rate demonstrate a negative relationship, albeit with weak significance in determining the inflation rate in Nigeria. On the other hand, interest rate has a positive effect on inflation rate. Based on these results, several policy implications can be derived. It is crucial for the government, when formulating monetary policy, to recognize that an increase in the money supply tends to have a more favorable response from the inflation rate. Additionally, the government must be mindful of the relationship between the interest rate and inflation rate. Therefore, this study recommends that the Central Bank of Nigeria comprehends the role of money supply in enhancing inflation rate adjustments and devises monetary policies that would facilitate the proper functioning of the economy, ultimately leading to a stable price level.