ABSTRACT
Money supply is one of the important macroeconomic variables. The control of money supply is an essential tool in conducting monetary policy within the monetary targeting framework. The success of monetary policy critically depends on the controllability the monetary authority has over money supply.
In view of this, this research work aimed at identifying the variables that determine money supply in Nigeria, specifies the correct relationships between these variables and money supply as well as to provide statistical evidence vis-a-vis the relationship in Nigeria, and also examines the most current important issues and questions in Nigerian money supply determination. Thus, the thesis lays emphasis in monetary policy as well as the viability of money supply and its determination in Nigerian economy. The period covered is 1983 to 2008.
In the course of determining the relationship, the study applied the econometric technique- Ordinary least squares Estimates (O.L.S.E), Error correction model(E.C.M) to time series data. More so, correlation matrix, percentage proportion and co-integration technique using, the unit root and granger causality test is used to verify the stationarity of the time series in order to avoid analyzing inconsistent and spurious relationship in the model, thus, ascertain whether past value helps to explain current value.
From the regression result, it was found that all the variables put forward i e money supply in the last period, domestic credit to public sector, domestic credit to private sector, net foreign assets and net of other items were significant in explaining money supply determination in Nigeria. By implication, Using Standard Granger Causality test, this study demonstrates that money supply in Nigeria for the period 1980-2003 is not exogenously determined.
CHAPTER ONE
Introduction
Money supply mechanism has been receiving increasing attention than any other subject matter in the field of monetary economics in recent years. Because of the importance of money supply via monetary policy in achieving macro-economic objectives of nations (developed and developing), persistent concern has always been given among monetary economists including Ajayi (1972), Mckinnon (1973), Shaw (1973), Oyejide (1974), Fry Mathieson (1980), Ojo (1993), Ghatak (1995), Odedokun (1996), Levine (1997), Tomori (1984) ,Asogu (1998) , Ogun and Adenikinju (2004), and Owoye and Onafowora (2007) to the process of money supply and its determination.
The control of money supply is an important policy tool in conducting monetary policy within the monetary targeting framework. The success of monetary policy critically depends on the degree of controllability that the monetary authority has over money supply. The implicit assumption is that the central banks can determine the growth of money supply, and the level of money stock is the product of two components: the monetary multiplier and the monetary base. The monetary base is the quantity of government-produced money. It consists of currency held by the public and total reserves held by banks. Doguwa (1994).
According to Bhole (1987), Monetarists in general, argue that the monetary authorities can exercise effective control over the stock of money while the non-monetarists on the other hand, hold that the determination of stock of money is part of the simultaneous solution for all variables in the financial and real sectors of the economy. He further states that apart from policy action by the central banks, money stock is determined by the behaviour of the public in various asset and commodity markets. Opposing such non-monetarist arguments, the monetarists argue that the behavioural patterns of the public and the banking system are stable and predictable enough to permit the monetary authorities to control the stock of money. While such opposing views have been widely debated, empirical evidence on the issue is critical to conducting monetary policy in practice.
Akhtar, (1997) and CBN, (1995), opine that monetary policy influences the level of money stock and/or interest rate, i. e. availability, value and cost of credit in consonance with the level of economic activity. Macroeconomic aggregates such as output, employment and prices are, in turn, affected by the stance of monetary policy through a number of ways including interest rate or money; credit; wealth or portfolio; and exchange rate channels
However, Akinnifesi and Philllip (1978), in their effort, to examine the determinants and control of money stock in Nigeria, argue that, monetary authorities apply discretionary power to influence the money stock and interest rate to make money either more expensive or cheaper depending on the prevailing economic conditions and policy stance, in order to achieve price stability. This is why Wrightsman (1976), concludes that monetary policy is nothing but a deliberate attempt to control the money supply and credit conditions for the purpose of achieving certain broad economic objectives. In general, most monetary authorities or central banks have been saddled with controlling inflation, maintaining a healthy balance of payments position to safeguard the external value of the domestic currency and promoting economic growth.
While attempting to identify the appropriate definition of money in Nigeria, Ojo (1978) adopted Chetty’s theoretical approach with the use of 1961-79 data and found that the wider definition of money is more appropriate when measuring national income in the Nigerian economy. Uchendu (1997) however, in an attempt to establish a relation between monetary base and money supply defines money supply from the Central Bank balance sheet accounting framework as (M1) is the sum of currency in circulation C, and deposits D. Thus, M1= C+D, and from the broader definition M2 = C+D+TD, where TD = time deposit
More so, Nnanna, (2002) and Ojo, (2001) in the process of identifying the assets and liabilities of the financial sector, define money supply (M2) which is the expanded of narrow measure of money (M1) to include time and saving deposits at the money banks (DMBs) which is also term Quasi-money (QM) which are not directly useable as a means of payment but can in practice be converted into generally acceptable means of payment. Thus, M2 = M1 + QM
In general terms, money supply could be defined as comprising narrow and broad money. The narrow money (M1) includes currency in circulation with non-bank public and demand deposits or current accounts in the banks. The broad money (M2) includes narrow plus savings and time deposits as well as foreign denominated deposits (CBN, 2010).
However, Ogunmuyiwa and Ekone (2010), in analyzing the relation between money supply and economic growth, opined that the broad money measures the total volume of money supply in the economy. Thus, excess money supply (or liquidity) may arise in the economy when the amount of broad money is over and above the level of total output in the economy. They further stress that the need to regulate money supply is based on the knowledge that there is a stable relationship between the quantity of money supply and economic activity that if its supply is not limited to what is required to support productive activities, it will result in undesirable effects such as high prices or inflation
Oyejide (2004), stresses the importance money supply in the study of inflation and its effect on aggregate demand. Availability of money makes demand effective i.e. it enable such demand to be translated to reality. But if production level in an economy cannot sustain the level of aggregate demand. The excess demand will bid up general price level thereby bringing about inflation. Hence, the need to maintain suitable balance between this is done to provide for easy analysis.