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Impact of money supply on economic growth in Nigeria

 Format: MS WORD   Chapters: 1-5

 Pages: 68   Attributes: COMPREHENSIVE RESEARCH

 Amount: 3,000

 Feb 19, 2020 |  10:57 pm |  1197

CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND TO THE STUDY

The relationship between money supply and economic growth has been receiving increasing attention in recent years. Economists differ on the view of effects of money supply on economic growth. While some agreed that variation in the quantity of money is the most important determinant of economic growth, and that countries that devote more time to studying the behaviour of aggregate money supply rarely experience much variation in their economic activities (Handler 1997). Others are sceptical about the role of money or gross national income (Robinson, 1952). Kuznet (1955) supports the view that financial markets starts growing as the economy approaches the intermediate stage of the growth process and develop once the economy becomes matured. This connotes that economic growth stimulates increased financial development. Steve (1997) and Domingo (2001), explained that there may not be possibility of economic growth without an appropriate level of money supply, credit and financial conditions in general.

In economics, money supply or money stock is the total amount of monetary assets available in an economy at a specific time.Money supply data are recorded and published usually by the government of central bank of the country. Public and private sectors analyst have long monitored changes in money supplybecause of its effects on the price level, inflation, the exchange rate and the business cycle.In other words money supply is the entire stock of currency and other liquid instruments in a country’s economy as of a particular time.The money supply can include coins,cash and balances held in checking and saving accounts.Economists analyse the money supply and develop polices revolving around through controlling interest rate and increasing or decreasing the amount of money flowing in the economy. Money supply data is collected, recorded and published periodically, typically by the country’s government or central bank.The various types of money in the money supply are generally classified as Ms such as M0, M1, M2 and M3, according to the type and size of the account in which the instrument is kept.Not all the classification are widely used and each country may use different classifications. M0 and M1,for example, are also called narrow money and include coins and notes that are in circulation and other money  equivalents that can be converted easily to cash.M2 included M1 and in addition,short term time deposit in banks and certain money market funds.An increase in the supply of money typically lowers interest rate,which in turn generates more investment and put more money in the hands of consumers,thereby stimulating spending.Businesses respond by ordering more raw materials and increasing production.The increased business activity raises the demand for labour. The opposite can occur if the money supply falls or when its growth rate declines.

Since its establishment in 1959,the central bank of Nigeria (CBN) has continued to play the traditional role expected of a central bank,which is the regulation of the stock of money in such a way as to promote the social welfare (Ajayi,1999). This role is the achievement of full employment equilibrium,rapid economic growth,price stability and external balances (Fasanya and Adekoya2013,Adesanya and Omoju 2012). The relationship between money supply and economic growth has been receiving increasing attention that any subject matter in the field of monetary economics in recent years. Economic differ on the effect of money supply on economic growth. While some agreed that variations in the quantity of money is the most important determinant of economic growth and that countries that devote more time to studying the behaviour of aggregate money supply experiences much variations in their economic activities(Handle,1997)others are sceptical about the role of money on gross national income(Robinson 1950,1952). Financial markets starts growing as the economy approaches the intermediate stage of growth process and develop once the economy becomes matured (Kuttner 2001). This connotes that economic growth stimulate increased financial developments.

According to Dedolab and Lippi(2000), they may not be possibility of economic growth without an appropriate level of money supply,credit and appropriate financial conditions in general.Evidence has shown that since 1980 some relationship exist between the stock of money and economic growth or economic activity in Nigeria. Over the years,Nigeria has been controlling her economy through variations in her stock of money.Consequent upon the effect of the collapse of oilprice in 1981 and the balance of payment (BOP) deficit experienced during this period,various methods of stabilization ranging from fiscal to monetary policy were used. Ikhide and Alwoda(1993) concluded that reducing money stock of money through increased interest rate would lower gross national product(GNP). Thus the notion that stock of money varies with economic activities applies to the Nigerian economy. As already explained money supply exerts considerable influence on economic activity in both developed and developing economics. The low level of supply of monetary aggregate in general and money stock in particular had been responsible for the fundamental failure of many African countries to attain growth and development. Various scholars have laid much of the blame for the failure of monetary policies to translate into economic growth on the government and it’s agencies as a result of poor implementation and sincerity on the part of policy executors. In discussing the concept of money supply and it’s impacts,two other issues often come to our mind which is the state of inflationary pressure and the unemployment rate. According to the monetarists,an increase in money supply in an economy causes an increase in general price level of commodities which about inflationary in the country (Uzougu 1981). Also related to the issue of inflation is the issue of unemployment which is the primary goal of any economy so as to produce as many goods and services as possible while maintaining an acceptable level of price stability,but this major goal will be very difficult to attain at high inflation rate and price instabilities due to excess money supply in the economy. This research work therefore, would review the technicalities involved in the control of money supply in Nigeria.

1.2    STATEMENT OF THE RESEARCH PROBLEM

The recurrence of general price instability, persistence inflationary pressures and unemployment in the economy, in spite of the plethora of monetary policy measures adopted and applied over the years left many economists and other analysts to question the policy measures of government. There is also the problem of general feeling that a continuous annual rate of money increases will adversely increase the rate of price level which may deny the intended effects of use of monetary policy measure to influence economic growth thus, requiring a policy response. Recently, these inflationary have succeeded in bringing about devaluation in Nigeria’s currency value as a result of expansionary measures of money supply. The work therefore seeks to assess the effectiveness of monetary policy on the Nigeria economy.

 

1.3    RESEARCH QUESTIONS

In view of the research problem the following research question are set to be answered.

1.   What is the impact of money supply on economic growth in Nigeria?

2.   What is the impact of bank credit on economic growth in Nigeria?

3.   How can monetary policy be used to promote economic growth in Nigeria?

1.4    OBJECTIVES OF THE STUDY

As a result of the problems mentioned above the researcher is set to achieve the following objectives.

1.   To determine the impact of money supply on economic growth in Nigeria.

2.   To ascertain the impact of bank credit on economic growth in Nigeria

3.   To access the effectiveness of monetary policy in Nigeria.

1.4    RESEARCH HYPOTHESES

The hypotheses are built around objectives because they probe into what can be revealed through statistical means. The following are the two null hypotheses that are to be tested:

Ho1: Money supply has no significant impact on economic growth in Nigeria.

H02: Bank credit has no significant impact on economic growth in Nigeria.

1.5   SIGNIFICANCE OF THE STUDY

This research work will investigate the beneficial effects of the control of money supply especially its impacts on economic growth in Nigeria. It will also add to the existing knowledge about the relationship between money supply and inflation in Nigeria. It will equally help students, government, policy makers and corporate bodies in areas relating to monetary policy, the volume of credit to be supplied and economic growth stabilization. The implication of this is not farfetched as research in the field could lead to proper and more focused policy formulation.

1.6    SCOPE OF THE STUDY

We rely on the secondary data for this study of which the sources are the Central Bank of Nigeria (CBN) statistical bulletinof various issues.It is expected that in the course of study that the researcher will examine and appraise the stock of money supply and it’s impacts with regards to growth in the Nigerian economy.

1.7    ORGANIZATION OF THE STUDY

This study is divided into five chapters.

Chapter one includes background of the study, statement of the research problem, research questions, objective of the study. Chapter two contains literature review which can be sub-divided into two parts theoretical and empirical review. Chapter three focuses on the methodology which contains theoretical methodology, Identification of variables for the study, Model specification and source of data. Chapter four is the presentation and analyses of results. This is based on statistical criteria, economic test, and evaluation of working hypothesis. Chapter five includes the summary, policy recommendation and conclusion.

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