Academic journal article Journal of Economics & Management

The Influence of Money Supply on Inflation in Nigeria

Academic journal article Journal of Economics & Management

The Influence of Money Supply on Inflation in Nigeria

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1.Introduction

In the last few years, the caption that has covered the headline of newspapers, economic forums, one-to-one interviews, panel interviews, government agenda and so on has meandered around high inflation rate, high exchange rate, high interest rate, scarcity in the forex market, low or negative gross domestic product gross domestic product growth rate, corruption, civil wars, insurgency to mention a few in Nigeria and few other African countries which include Tanzania, Kenya, Ethiopia, etc. But the major concern of this study is that of high inflation rate which common to Nigeria and the likes; more so because, it is one of the key macroeconomic aims of the government. The reason for this is because it has a direct implication on the standard of living of the people in any country, especially in Nigeria. Surprisingly, politicians across the world look at this issue as if they are horrific visitation in the form of food shortages, self-inflicted hardship, poverty, foreign invasion or a plague, over which they have no control.

In Nigeria, the syndrome of inflation has been so alarming from the outset of the earlier and current administrations despite the various promises by politician both in the pre-democracy and democracy era to fight against it in Nigeria. Unfortunately, none of them have ever been managed to stabilise or even reduce this despicable syndrome. Particularly, in this current governance, inflation rate has wide-ranged from 9.2% and 18.3% at the end of the first and fourth quarters of 2016 and decline to 16.1% at the end of the second quarter in 2017 which stands to represent instability of prices in the economy. Correspondingly, the rise in the inflation rate has accounted for about 100% rise in price levels of commodities and facilities (First Securities Discount House [FSDH], 2016). Remarkably, this problem of high inflation has attracted much theoretical and empirical effort. Yet, the sixty-four million naira (Nigeria's currency) question of what are the factors that stimulate high inflation in Nigeria have not been properly addressed (i.e. a very difficult question to answer). For instance, economic theory suggests that inflation is caused by growth in money supply in an economy.

All the more especially, the need to curb high inflation is inevitable to most researchers, policy makers and serious-minded government and as such has different opinion about the proper measures used in stabilising this syndrome. For instance, the school of thought that advocate for monetary policy measure believes that government should cut the money supply via credit refrain and stable budget deficit. As a matter of fact, the above suggestion is workable, however, with little defect, which is the tendency to truncate economic stability in the market mechanism as a result of the unprompted variation in inflation.

Be that as it may, the simple and practical solution is to curb the government expenditure which causes a deficit in the process of economic development. This is because when money supply treks up, it has the tendencies to deprecíate the value of monetary units speedily therefore, leading to increase in the cost of living of everyone in the economy, de-motivate businesses, and therefore discourages investment due to high cost of doing business. The latter point of view account for the reason most investors (foreign and national) are moving their businesses away from Nigeria to other countries which in turn reduce economic growth as opined by Mbongo, Mutasa, & Msigwa (2014).

Conversely, the economic growth of Nigeria has not been too mesmerising, especially after the global financial crisis in 2007/2008. Though, the economy experienced a highly regarded growth in the post-independence era. In this period, i.e. from 1960-1970, real gross domestic product accounted for 3.1% annual growths. Similarly, real gross domestic product grew by 6. …

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