FULL PROJECT – EVALUATION OF MONEY SUPPLY ON ECONOMIC GROWTH IN NIGERIA

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CHAPTER ONE

INTRODUCTION

1.1        BACKGROUND OF THE STUDY

In recent years, monetary economists have focused more on the link between monetary supply and economic expansion than any other topic. The impact of the money supply on GDP expansion has been the subject of heated debate among economists. Despite widespread agreement that shifts in the money supply are the single most important factor in GDP growth, and widespread evidence that economic activity fluctuates more widely in countries that devote more resources to studying the dynamics of the money supply as an aggregate (handle, 1997), others remain skeptical of the impact of money on GNP (Robinson 1950, 1952).

Since 1980, data have demonstrated a correlation between Nigeria’s money supply and the country’s rate of economic expansion or activity. For a long time, Nigeria has managed her economy through manipulating her currency supply. After the oil price crash of 1981 and the resulting BOP imbalance, governments throughout the world tried everything from fiscal to monetary policy to restore stability. Money stock may be reduced by raising interest rates, as Ikhide and Alwoda (1993) found. This has the effect of decreasing GDP (GNP). Thus, the idea that a country’s money supply changes in response to its level of economic activity holds true for Nigeria. As has been established, the quantity of money greatly affects economic behavior, both in advanced and emerging economies. Caused by a lack of available money, or money stock in particular, the recent economic downturn may be traced back to the low levels of monetary aggregate supply.

Many African nations have fundamentally failed to achieve growth and development. Many academics believe that inept policy execution and lack of sincerity on the side of government and its agencies are to blame for the inability of monetary policies to spur economic expansion.

Two additional topics typically brought up in discussions about the money supply and its effects are the level of inflationary pressure and the jobless rate. The monetarist view holds that inflation occurs when a country’s money supply grows, leading to higher prices across the board (uzougu 1981). High inflation rate and price instabilities caused to excess money supply in the economy are very detrimental to the basic purpose of any economy, which is to create as many products and services as possible while maintaining an acceptable degree of price stability. Therefore, the purpose of this study is to examine the mechanisms behind Nigeria’s monetary policy.

1.2    STATEMENT OF THE PROBLEM

A study of this nature is always necessitated by the existence of certain problems. The major problem that trigged off this work is the recurrence of general

price instability, persistent inflationary pressures and unemployment in the economy, in spite of the plethora of monetary policy measures adopted and applied over the years.

There is also this problem of general feeling that a continuous annual rate of money increases will adversely increase the rate of price level which will directly lead to inflation, which may deny the intended effects of use of monetary policy measure to influence economic growth thus, requiring a policy response. Recently, these inflationary pressures have succeeded in bringing about devaluation in Nigeria’s currency value as a result of expansionary measures of money supply.

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FULL PROJECT – EVALUATION OF MONEY SUPPLY ON ECONOMIC GROWTH IN NIGERIA