The Impact of Money Supply on Inflation in Nigeria (1981 - 2021)

: This study examined the impact of money supply on inflation in Nigeria between 1981 and 2021, using Auto-Regressive Distributed Lag (ARDL) approach is employed to estimate long run relationship amongst variables. The data for the variables were sourced from CBN statistical Bulletin 2021 edition. The results of the test established a significant long run positive and negative relationship between Inflation and Interest towards money supply on inflation in Nigeria. Based on the results of the variables, it is therefore recommended that the policies put in place by the monetary and fiscal authorities in Nigeria should be such that will encourage the supply of money to a certain level in order to curb inflation in Nigeria in the short medium and long term.


Introduction
The maintenance of price stability is one of the main objectives of Macroeconomic Management (CBN, 1998).In other to achieve this, the monetary authority needs to control the amount of money in circulation through the use of monetary instrument such as bank lending rate, reserve requirement and so on, monetary policy has been defined as an action of the monetary authority to influence the quantity, cost and availability of money credit in order to achieve desires macroeconomic objectives of internal and external balances (CBN, 2011).While inflation on the other hand, has been described as persistence and appreciable increase in general price level of goods and services over a period of time (Jhingan, 2002).However, it is not in every case that an increase in price level of goods and services could be referred to as inflation.Thus, for an increase in general price level is regarded as inflation.Therefore, for an increase in price level to be regarded as inflation, such an increase must be constant, enduring and sustainable.For inflation to occur therefore, the price level should affect almost every commodity and should not be temporal.Hence, since the money supply also affects price levels, monetary stability can help maintain price stability (Ryczkowski, 2021).
More so, the rising trend in the inflation rate in Nigeria has become a source of concern to the government, policy makers, researchers, and members of the public.According to Okere and Sanni (2005); Nwachukwu, Philip, Dibie, Azukaego Christopher, Ogudo and Pius ( 2014) inflation has become one of the perennial problems that have plagued the nation especially in the late 1980s and1990s.Particularly in the year 2020, Nigeria experienced double-digit inflation and it has become a major threat to economic activities, especially on workers whose standard of living declines continuously (Okotori, 2020).

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Moreover, inflation in the Nigerian economy is generally thought of as a complex phenomenon, which however tends to be greatly grown as a result of several factors.The recorded increase of inflation rate in the Nigerian economy shows clearly the failure of the existing economy policies in maintaining the stability of the general level of prices.Notwithstanding this fact, the average rate of inflation rate in Nigeria reached 22.79% during 2006 -2023, and would move beyond that, which reflected the speed of product price change explaining the general rise in commodity and service prices.To sum up, it has been confirmed that there is a major effect of economic inflation rate on the Nigerian economy.The aim of the present research is to investigate the relationship between money supply and inflation in Nigeria.The specific objectives of the study are: to ascertain the impact of Money Supply on inflation in Nigeria, to determine how Gross Domestic Product relates to inflation in Nigeria, to ascertain the relationship between Import and inflation in Nigeria, to determine how the Exchange Rate is related to inflation in Nigeria, to ascertain the Interest Rate relates to inflation in Nigeria, to determine the relationship between Budget Deficit and inflation in Nigeria, to ascertain how Domestic Debt relates to inflation in Nigeria and to ascertain Total Government Debt relates to inflation in Nigeria.This study intends to answer the following questions: Does Money Supply ascertain the impact of Money Supply on inflation in Nigeria?Does Gross Domestic Product relates to inflation in Nigeria?What is the relationship between Import and inflation in Nigeria?Does Exchange Rate relates to inflation in Nigeria?Does Interest Rate relates to inflation in Nigeria?What is the relationship between Budget Deficit and inflation in Nigeria?Does Domestic Debt relates to inflation in Nigeria?Does Total Government Debt relates to inflation in Nigeria?The following hypotheses which are stated in the null form are tested in this study: H01: Money supply has no impact on inflation in Nigeria.
H02: Gross Domestic Product does not have a relationship with inflation in Nigeria.H03: Import does not have a relationship with inflation in Nigeria.
H04: Exchange Rate is not related to inflation in Nigeria.
H05: Interest Rate is not related to inflation in Nigeria.
H06: Budget Deficit has no relationship with inflation in Nigeria.H07: Domestic Debt is not related to inflation in Nigeria.
H08: Total Government Debt is not related to inflation in Nigeria.
Money supply is one of the key factors of inflation, and many industrialized and emerging countries have faced and continue to face the enormous challenge of inflation throughout history.Higher inflation has severe negative impacts and must be kept within its limits.As a result, it should be investigated for policy development and implications in order to maintain it within bounds.Because of the positive influence on various income earning groups, creeping inflation is acceptable in the speed of economic expansion.Some economists feel that a low and constant inflation rate of 3% carries a minor economic cost (Mankiw, 2011).According to available empirical evidence, Nigeria has experienced low inflation.The rest of the paper is structured around four sections; the next section two contains the literature review, section three presents the data and methods, and section four includes the results and discussion.

Literature Review Theoretical Literature
Theoretical literature on the impact of Money supply on inflation in Nigeria is filled with contradictory views with regard to the causes of inflation.In fact, there are several theories that explain what causes inflation; however, most of them are formulated on the basis of the aggregate demand (demand -pull) and costpush theories.Even though there are some controversies surrounding these two theories (Ball andDoyle, 1969, as cited in Greenidge &DaCosta, 2009), amongst all the arguments, they are the least controversial and lay the foundation for debates on inflation.Below are the theoretical explanations as postulated by various economists and schools of thought.

(A) Demand-Pull or Monetary Theories of Inflation
Demand-pull or monetary theories of inflation define inflation situations where aggregate demand for goods and services exceeds aggregate supply, thereby leading to a general rise in price levels (Otto & Ukpere, 2016).This approach states that high government spending policies of central banks to raise money supply, rise in household and firms' consumption and prices in the international market compared to that of the domestic market are responsible for raising the price level (Ogbokor & Sunde 2011).The demand-pull paradigm is of the view that inflation exists when aggregate demand for goods and services exceeds aggregate supply for goods and services, such that the excess aggregate demand cannot be satisfied by running down the existing stocks, diverting suppliers from the export market to the domestic market, increasing imports or postponed demand (Anyanwu, 1993).
The demand-pull inflation may also be called surplus demand inflation because it arises from too much money chasing too few goods.Anyanwu (1993) opined that this was the situation during the Biafra-Nigeria war and after the Udoji Salary Awards of 1974 when wages increased astronomically.Higher wages increased the purchasing power of consumers thus leading to increased demand.The pressure on commodities, therefore, led to increases in their prices.More often it occurs where there is full employment so that the excess pressure on the factors of production leads to higher prices for the factors, ultimately leading to a rise in the cost of production.It could also be a short-run phenomenon where demand dynamics were not well anticipated.When there are production constraints, demand beyond the possible output level could also create inflation.

(B) Cost-Push Theories of Inflation
Cost-push inflation exists when wages or production costs start rising.The producers in turn pass these rising costs upon the consumers, leading to higher prices (Undji & Kaulihowa, 2015).Depreciation of the exchange rate can initiate an increase in the prices of goods as most firms import the bulk of raw materials required for their production at higher prices.Ogbokor & Sunde (2011) noted that this kind of inflation occurs mainly because of a rise in the cost of imported raw materials and an increase in the cost of labour.Otto & Ukpere (2016) noted that cost-push inflation can also be called "market power inflation" because the increase in the prices of goods and services originates from the supply side of the economy.These increases may arise from increased wage rates or a fall in productivity which also increases the cost of labour output.It may also arise out of other factors of production or cost of inputs such as power supply, transport or raw materials.In Nigeria, multiple taxation and corruption are major suspects.Alexander, Andow & Danpome (2015) opined that the cost-push theory maintains that prices of goods and services rise because wages are pushed up by trade unions' bargaining power, or by the pricing policies of oligopolistic and monopolistic firms with market power.The cost-push view attributed inflation to a host of non-monetary supply-oriented influences of shocks that raise costs and consequently prices.Onwiodukit (2002) noted that this school of thought attributes inflation to random non-monetary shocks such as crop failures, commodity shortages, vagaries of weather and an increase in the price of oil.

(C) The Classical Theory of Inflation
The classical theory of inflation is derived directly from the classical quantity theory of money which is one of the oldest surviving economic doctrines.The theory is found in the famous equation of exchange developed in the 19th century by Irving Fisher (1876 -1947).Fisher's equation of exchange states that MV = PY.If velocity (V) and output (Y) are constant, the increase in money (M) will cause a direct and proportionate increase in prices (P) (Almahdi & 239 Faroug, 2018).The theory assumes full employment in the economy while M is exogenously determined by the monetary authority.The greatest shortcoming of this theory is that it does not explain the channel (whether interest rate, wages, unemployment, demand, etc.) by which an increase in money supply causes the rise in the price level.

Empirical Literature Review
Several studies have examined the impact of money on inflation in both developed and developing nations although only a few of them are done in Nigeria.However, the impact of money supply on macroeconomic variable performance such as inflation has gained considerable pronounce in Literature, where many developing countries including Nigeria are making financial efforts to ensure price stability in order to promote economic growth.Empirically, Oumbe (2018) examined the "effect of monetary policy on inflation" and the "nature of the relationship between money supply and inflation in Cameroon".Time series annual data was used from 1980 to 2016.Johansen's Cointegration test was used to determine the relationship between money supply and inflation.Autoregressive Distributed Lag (ARDL) estimation technique was used to examine the effect of money supply and inflation in Cameroon.Toda and Yamamoto's causality tests were also used to test the causality between money supply and inflation.The result showed that there is a long-run equilibrium relationship between money supply and inflation; money supply had a significant and positive impact on inflation in Cameroon and there is one-way causality from money supply to inflation.The study also exhibited that inflation has a monetary source in Cameroon.Thus, monetary policy should be planned to maintain the stability of price by controlling the growth of the money supply in the economy of Cameroon.
Olorunfemi & Adeleke (2013) also examined the effect of money supply on inflation by including interest rate as one of the control variables, using monthly data from 1980 to 2010.The study utilized the OLS method and concluded that money supply and interest rate did influence inflation in Nigeria.Tang and Lean (2007) found that the effect of money supply (M1) on inflation in Malaysia is negative and statistically significant at a 1 percent level.Roffia and Zaghini (2008) analyzed the data of 15 industrialized countries and found that there is no positive correlation between money growth rate and price index in at least 50% of the cases.Kiganda (2014) tested the relationship between inflation and money supply in Kenya through the use of annual time series data during the period of 1984-2012.The results indicated that there is a significant positive long-run relationship between inflation and money supply, and inflation is significantly error correcting at 68% annually.Islam, Ghani, Mahyudin & Manickam (2017) investigated the determinants of factors that affect inflation in Malaysia, variables used are money supply, exchange rate, and inflation, the quantitative method of analysis was adopted.The result indicates that a rise in the unemployment rate will lead the inflation rate to decrease to a drop and vice versa.The relationship between exchange rate and inflation is negative, whereas money supply and inflation have a positive relationship.Ofori-Frimpon et al. (2017) studied the effect of money supply on inflation rate in Ghana using annual data from 1967 to 2015 to test the model.The research was restricted to using money supply as an independent variable on the dependent variable, which was an inflation rate.The results showed that there was a long-run positive link between money supply and inflation rate based on an Ordinary Least Square (OLS) method.
Obi & Uzodigwe (2015) supported the argument by monetarists who argue that inflation is essentially a monetary phenomenon in the sense that a continuous rise in the general price level is due to the rate of expansion in money supply far in excess of the money actually demanded by economic units.The study assessed the dynamic linkage between money supply and inflation in ECOWAS member states; West African Monetary Zone (WAMZ) and West African Economic Monetary Union (WAEMU) from the period 1980 to 2012.They used both the univariate and panel data, to assess the stationary properties of the series.The random effect model for ECOWAS member states shows that the impact of money supply on inflation is effective in the current and first period.While the impact is effective in the first period for WAMZ, WAEMU experiences the impact in current period.They also found significant specific-country effects on the variables.AlNaif et al. (2018) analyzed the relationship between the money supply and inflation during the period of 1968-2015 in Jordan.They used a methodology of econometric analysis of time series.The results indicated that "there was no causal link between the money supply and the price index in the long term, and money supply causes inflation not vice versa in the short term in Jordan."Sultana et al. (2019) checked the "relationship between money supply and inflation in Bangladesh" using monthly data from May 2010 to December 2017, the Co-Integration, and Vector Error Correction Techniques.They demonstrated that the money supply did not affect inflation in the short term, not vice versa.They also found a bidirectional causal relationship between money supply and inflation in the long term.Danlami et al. (2020) investigated money supply and inflation using the ARDL technique.It was found that economic variables are not integrated in the same order.The money supply increment was found to demonstrate inflationary pressure in the short run.However, in the long run, the money supply was found to have no significant influence on inflation.Hicham (2020) said that Money supply, Economic Growth and inflation rate has the period of 1970-2018 in Algeria using Co-Integration and Causality Analysis.The findings lend credence to the monetarist theory of inflation rate on the grounds that an increase in the money supply has no effect on the rate of economic growth.

Gap in literature
The main motivation of this study is to assess the effect of money supply on inflation in Nigeria.There are ample empirical evidence in the literature about money supply and inflation some of them are Sultana (2019), Oumbe (2018), Islam, Ghani, Mahyudin and Manickan (2017), Ofori, Danqua and Zhang(2017), AlNaif, Shahtite, & AlTaib, (2018), Obi and Uzodigwe (2015), Olorunfemi & Adeleke (2013) and Kiganda (2014).However, all these studies reviewed above and the results obtained have their theoretical backing in the monetarist view.Also it will be noted that there are some literatures which have contrary opinion from the monetarist view.They believe that inflation is not only a monetary phenomenon as there are other factors that affect inflation in an economy.Some of these studies are Tang and Lean (2007), Roffia and Zaghini (2008), Hicham (2020) and Danlami, Abdulhamid, Hidthiir, and Sallahuddin (2020) and so on.Hence this study makes an attempt at filling the gap in the literature and presents an analysis of the effect of money supply on inflation in Nigeria by combining gross domestic product among other variables to examine how money supply affects inflation in the economy.

Methodology
Annual Time Series Data covering the period of 1981 to 2021 which were obtained from the Central Bank of Nigeria Statistical Bulletin 2021 Edition was used in this study.Using Augmented Dickey-Fuller (ADF), the variables are subjected to stationary testing.Time series characteristics of the research variables need to be studied in order to determine the order of their integration.Time series data are mostly not stationary, meaning that the mean, variance, and covariance of such data sets are not invariant in time (Gujarati, 2009).Non-stationary series can result in spurious and misleading regression.This study employs descriptive statistics and the Auto-Regressive Distributed Lag (ARDL) methodology which suggested by Pesaran, Shin and Smith (2001) for the analysis of data.

Theoretical Framework
To illustrate the impact of Money supply on inflation in Nigeria, it takes into account the guidance on the methodology of Hicham (2020) with some modifications to the variables and technology employed to fit the data and the case study of Nigeria.Using Augmented Dickey-Fuller (ADF) unit root test was conducted and the result necessitated the test for the short-run and long-run relationship among the variables (co-integration).Also, the study employs the Auto-Regressive Distributed Lag (ARDL) methodology suggested by Pesaran, Shin and Smith (2001) for the analysis of data.

Model specification
The model which hypothesised variations in inflation to be a function of the explanatory variables are algebraically specified.The Model is specified based on demand-pull theories.

Model
The model is thus: Where: The parameterized version of the inflation model is presented as: In order to estimate equation, we specify it in econometric form as: Where: 2,3,4,5,6,7,8)       =   However, a log-linear form is more likely to find evidence of a deterrent effect than a linear form, we therefore log-linearized equation as:

Priori Expectation of the Model
The expected signs of the coefficients of the explanatory variables are: is used as a measure of predictive variable.

Descriptive statistics:
The descriptive coefficients compiling a data set that is either a representation of entire population or a sample is called Descriptive Statistics.The main purpose is to provide a summary of the samples and measures done on the study.However, it involves the use of graph to show the trends of all variables used in the research.

Test for Unit Root:
The presence of trends and unit roots are detected from the slowly decaying autocorrelation function in univariate process which indicates non-stationarity.Consider AR(p) model so that Which can be written as is a polynomial in lag L.
If the root of the characteristic equation The ADF test belongs to a category of tests called 'Unit Root Test', which is the proper method for testing the stationary of a time series.The Augmented Dickey-Fuller test checks through these models: ( 1) ( 1) (9)  .( ^) ≃ (, , ) Is compared with the appropriate value of Dickey Fuller table.
The null hypothesis for the tests is that the data are non-stationary, and it is rejected for this test so that we want a p-value of less than 0.05.

ARDL Bounds Test for Co integration:
In order to empirically analyze the long -run relationships and short run dynamic interactions among the variables of interest we apply the Autoregressive Distributed Lag (ARDL) co integration technique the ARDL bounds test is based on the assumption that the variables are I(0) and I(1) (pesaran etal, 2001).

Short Run and Long Run Estimation of the ARDL model:
The short run equation in our model is given as follows: Where "D" represents the first difference operation of the variables, ECM (-1) is the one period lag of the model residual.The parameters 1 β to 8 β are the short run coefficients of the model while the coefficient of ECM (-1) is the long run speed of adjustment of the model.The sign of the coefficient of ECM (-1) should be negative and significant as well for holding the long run equilibrium (Dhungel, 2014).
The long run equation can be stated thus:

Granger causality test:
This study intends to use Granger causality test to ascertain the direction of causality between money supply and inflation in Nigeria.In Grangers causality relationship is expressed in two pairs of regression equations by simply twisting independent and dependent variables.Therefore, from the equation below the model specification on causality between money supply and inflation is specified as follows:

Results and Discussion
Preliminary Analysis

Trends in Inflation (1981-2021)
Inflation exhibits an upward moving slope.The graphical illustration in figure 4.1 shows the trend of Inflation in Nigeria from 1981 to 2021.Units are measured in percentages.Overall, the INF exhibits an upward slope and downward slope with the maximum value being 72.84000% in 2021 and a minimum value of 5.390000% in 1981.The weighted averages increased and decreased over the years as a result of inflation on the prices of commodities.

Trends in Money Supply (1981-2021)
The graph in figure 4.      The figure 4.7 represents the trend of budget deficit during the period under study.The trend analysis between 1981 and 2021, budget deficit decreases negatively from N7118.708billion to N32.04940billion.Overall, there were negative fluctuations in its movement over the period under consideration.Descriptive statistics show the qualities of the data we are using for estimation.This allows us to define the appropriate methodology for estimation.The table 1 (Appendix 1) summarizes the descriptive statistics.The results of the ADF unit roots tests of the series in table 2 show that all the variables are stationary at levels except import, exchange rate and interest rate that are stationary at second difference.The variables are therefore integrated of order 0, 2 i.e.I (0) and I (2).The null hypothesis of unit root is therefore not accepted since the ADF test statistics are greater than the critical values at the indicated levels of significance.Thus, money supply on inflation in Nigeria as well as the modelled variables are stationary, which follows an integrating I (0) and I (2) processes.Having determined that ADF unit roots tests variables are integrated of order 0 and 2 and are stationary, the researcher moved on to verify whether the combination of the variables are co -integrated and as such employed the ARDL bound test.

Conclusion, Recommendations and Policy Implication
Empirical evidence from the paper has shown that there is a positive and negative significant relationship between Inflation and Interest towards money supply on inflation in Nigeria.This means, there is an increase in Inflation and Interest, the rate of inflation is a diversely affected by fuelling inflation in line with the empirical finding of the research work.Hence, to reduce the level of inflation and ensure price stability in Nigeria, the monetary authority needs to regulate the amount of money supply into the 251 Nigerian economy.Therefore, should government intensify the effort to combat inflation by encouraging the monetary authority to put in place policies measures that are gear toward reducing the amount of money in circulation?
Depending on the results of the study, some recommendations can be identified, including: (A).The study finds a significant positive relationship between Inflation and Interest; it shows that continued the policies put in place by the monetary and fiscal authorities in Nigeria should be such that will encourage the supply of money to a certain level in order to curb inflation in Nigeria in the short medium and long term.
(B).However, the study finds a significant positive and negative relationship between Inflation and Interest.As a result, restrictive monetary policies should be put in place by the Central Bank of Nigeria (CBN) to ensure that inflationary pressure is pulled down to a reasonable level as money supply is one of the factors causing price instability in Nigeria.
As for the policy implication, having seen that there exist a long run relationship between Inflation and explanatory variables (Money Supply, Gross Domestic Product, Import, Exchange Rate, Interest, Budget Deficit, Domestic Debt and Total Government Debt) through the use of co-integration test, It implies that government should reduce her outrageous expenditures and control the incessant budget deficit that has been recorded in Nigeria while the central bank should desist from creating cheap currency so as to curb excess supply of money in the economy.In addition, the government should diversify the economy; enact easy export policy, subsidise fuel price since they turn out to be one the factors that triggers high inflation in Nigeria possibly because of the ripple effect they exhibit on economic activities in form of high transportation, high prices of food, necessity items to mention a few.Therefore, the study suggests more focus on other factors that trigger inflation in the country other than money supply so as to reduce its menace on the economic well-being.

Table 1 (
Appendix 1) presents the descriptive analysis of the time series properties of the variables included in the model.The descriptive statistics was carried out to report the essential properties of the variables.The table shows that Inflation, Money Supply, Gross Domestic Product, Import, Exchange Rate, Interest Rate,

Table 3 . Result of ARDL Bounds Test to Co -integration for the Model
From the results in table 3, the null hypotheses of no long -run relationships are rejected as the F -statistic value of 5.344597 is greater than the critical upper (II) bounds values of 3.15 at 5% level of significance for the model.This confirms the existence of long run relationships among the variables.Having established the existence of long run relationships, short run and long run impact of the explanatory variables are estimated.The results of the short run and long run impact of the explanatory variables on inflation to Nigeria are presented in table 4 for the model.
Source: The Author's Computation 2023.247

Figure 10. Result of CUSUM and CUSUM of squares Test of Stability for the Model 249
The outcome of the diagnostic tests of the model adequacy is satisfactory as the assumptions of normality, homoscedasticity and no auto -correlation is not violated.This is evidenced by the probability value of all test statistics which is greater than 0.05.The cusum and cusum of squares tests of stability results show that estimated parameter coefficients are stable at 5% level of significance.Therefore, the model is well specified, and hence the result is plausible.

Table 6 . Granger-causality test Results
In this study, it was observed that there was a bidirectional relationship among the variables as well unidirectional relationship existed, that is, INT causes INF, INF causes INT, GDP causes MS, IMP causes MS, MS causes IMP, MS causes BUDGETDEFICIT, MS causes DOMESICDEBT, IMP causes GDP, GDP causes IMP, EXR causes GDP, GDP causes EXR GDP causes BUDGETDEFICITNBN, GDP causes DOMESICDEBT, GDP causes TOTALGOVTDEBTNBN, EXR causes IMP, Source: The Author's Computation 2023.Table 6 contains the results of Granger Causality tests.The essence of this test is to establish a causal relationship among Inflation (INF), Money Supply (MS), Gross Domestic Product (GDP) Import (IMP), Exchange Rate (EXR), Interest (INT), Budget Deficit (BD), Domestic Debt (DD) and Total Government Debt (TGD).This test gives us the direction of causality among these variables.There are usually two outcomes of this test, unidirectional or bidirectional relationship.