ABSTRACT
The study was specifically embarked upon to establish the influence of macroeconomic factors on money supply in Nigeria using annual time series data from 1990 to 2016. Macroeconomic factors used for the study were interest rate, inflation, exchange rate and GDP growth rate while broad money supply was used as the dependent variable. The data was analyzed using the multiple regression analysis based on ordinary least squares technique. Form the results, it was found that interest rate and exchange rate were the significant variables that influenced broad money supply in Nigeria, while inflation and GDP growth rate were insignificant. Based on the findings, it was recommended among other things that monetary authorities should be committed to the mission of interest rate stability as well as improving the regulatory and supervisory frameworks to secure a strong financial sector for efficient intermediation to enhance money supply.
TABLE OF CONTENTS
CHAPTER
ONE: INTRODUCTION
1.1 Background
to the Study . . . . . . . 1
1.2 Statement
of the Problem . . . . . . . 4
1.3 Objectives of the Study . . . . . . . 5
1.4 Research
Questions . . . . . . . 5
1.5 Research
Hypotheses . . . . . . . 5
1.6 Scope of the Study . . . . . . . 6
1.7 Significance of the Study . . . . . . . 6
CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual
Framework . . . . . . . 7
2.1.1 Overview
of macroeconomic variables in Nigeria . . . 7
2.1.2 Money
supply . . . . . . 8
2.1.3 Link
between macroeconomic indicators and money supply . . 9
2.2 Theoretical
Framework . . . . . . . 22
2.2.1 Quantity
theory of money . . . . . . . 22
2.2.2 Liquidity preference theory of money . . 22
2.2.3 Portfolio theory of money . . . . . 23
2.2.4 Inventories theory of money . . . . . 23
2.3 Empirical
Review . . . . . . . 23
2.4 Summary
of Literature . . . . . . . 33
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research
Design . . . . . . . 34
3.2 Nature and Sources of Data . . . . . . . 34
3.3 Estimation procedure . . . . . . 34
3.4 Model Specification . . . . . . . 34
3.5 Description of research
variables . . . . . . 35
3.6 Technics of Data Analysis . . . . . . 36
3.6.1 Regression Analysis . . . . . . 36
3.6.2 Basis of evaluation . . . . . . 36
CHAPTER
FOUR: PRESENTATION OF DATA, ANALYSIS AND
DISCUSSION
4.1 Presentation of Data . . . . . . 37
4.2 Trend analysis of data . . . . . . 37
4.2.1 Broad money supply (M2) . . . . . . 37
4.2.2 Interest rate (INT) . . . . . . 37
4.2.3 Trend of inflation rate (INF) . . . . . . 37
4.2.4 Trend of exchange rate (EXR) . . . . . 40
4.2.5 Trend of GDP growth rate (GRT) . . . . . 41
4.3 Analysis of Macroeconomic indicators and
money supply . . . 42
4.3.1 Test of Hypotheses . . . . . 44
4.3.2 Decision of findings . . . . . 45
CHAPTER FIVE: SUMMARY OF FINDINGS,
ANALYSIS AND DISCUSSION OF RESULTS
5.1 Summary of Findings . . . . . 49
5.2 Conclusion . . . . . 50
5.3 Recommendations . . . . . 50
REFERENCES
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
Studies
on money supply and its determinants has long remained in the domain of
rigorous investigation dating back to the period when it helped in eliminating
the problems associated with the barter system. The supply of money plays a
central and very crucial role in macroeconomic analysis as it serves as the
core link between the monetary and the real sector of an economy. Kaplan & Gungor (2017)
noted that the relationship between the supply of money and its main drivers is
an important building block in macroeconomic theory and is a crucial component
in the conduct of monetary policy. Theories on the determinants of money supply
has attracted debates in the academic circle dating back to the period when Irving
Fisher implicitly put forward the earliest theory of money demand in his
quantity theory of money (Martin, 2013).
The money supply function also has crucial implications on the way the
central bank carries out its monetary policy under a monetary targeting
framework. A change in the money supply function is prerequisite for any policy-driven
change in macroeconomic variables to have predictable effect on output,
interest rate and ultimately prices and vice
versa (Bhunia, 2016). As such, macroeconomic variables such as inflation
rate, interest rate, exchange rate, GDP growth rate, etc. influences money supply
(Ubaka, 2016).
Generally,
macroeconomic variables are proxies used to
measure present conditions as well as to forecast economic fluctuations. Elaborating
further, macroeconomic variables include various indices, earnings reports, and
financial summaries such as exchange rates changes, consumer price index,
interest rates, etc. which are reported daily in the news (Ifionu &
Akinpelumi, 2015). According to Moraa (2015), while these variables provide
direct information of current economic trend, they also give some indication of
expected future liquidity. Changes in these indicators can also affect
decisions about portfolio composition, consumer spending, investment in the
stock market or treasury bills, and monetary policy (Patel, 2012).
Understanding how key macroeconomic indicators behave is therefore important to
making optimal decisions as to the quantity of money to be in circulation at
any given time (Ifionu & Akinpelumi, 2015; Ali, Mahmood & Bashir, 2015).
The
Classical and New Classical Economics, namely the traditional approach proposes
that money supply is significantly influenced by interest rates such that a
change in interest rates and price level induces money supply to change through
the opposite direction. However, Monetarists argue that money supply will be
affected when interest rates rise, such as income effect, price level effect
and expected inflation effect. Whether monetary authorities could or not affect
interest rates by determining money supply variables depends on these factors.
According to Ubaka (2016), most developing countries (like Nigeria), are easily
affected by supply shocks which leads to high variability in macroeconomic
indicators hence disturbing free flow of funds. However, due to government
intervention in the financial and goods markets, macroeconomic reactions may
cause economic instability and market failure which goes a long way in
influencing money supply.
As
a matter of fact a study of this nature is habitually necessitated by the
existence and continuation of certain problem. In the nation, it could be noted
that the collapse of the oil price has cause damaged the level of economic
output and caused economic rigidity, the irregular rise in inflation rate in
the nation and the Output of the economy in the form of Gross Domestic Product
(GDP) has caused an imbalance in the monetary base of the nation (Ifionu &
Akinpelumi, 2015). The economy is characterized by structural rigidities and
bottleneck. Most of our exports and imports are characterized by inelasticity
either on the demand supply side or both. The Nigerian economy is import
dependent, thus pressure on forex demand will inevitably create the alternative
market, hence different rates. Non-oil export is under-reported and proceeds
are hardly repatriated into the country, thus compounding the supply and output
rigidity. The guidelines of the CBN on the purchase of foreign currency are
often cumbersome, causing some frustrated potential foreign exchange users to
patronize the parallel market causing leakages which consequently reflects on
the inflation rate by bringing it up and continue to a weak exchange rate for
the nation, this and others constitute a problem to the monetary base and a gap
between the aforementioned macroeconomic variables and money supply level in
the nation.
1.2 Statement of the Problem
It
is a well-known fact that the Nigerian Economy is characterized by volatile
macroeconomic instability. Several measures embarked upon by the CBN failed to
correct these defects in the economy. The most important of these measures were
contained in the amendment of the CBN monetary circular No 21 which diverted
the control of rates from CBN on August 1, 1987. The bank had been in control
of the cost of credit in the economy regulating the interest rates charged by
the commercial and merchant banks in their lending activities which
characterizes money supply. As it is, banks determination and control of
interest rates on loans did not help for the stability of major macroeconomic
variables due to the volatile nature of rates during the planning period.
Currently, interest rates are market determined and the study intend to
investigate the impact of interest rate on some selected macroeconomic
variables. Hence, the CBN watches the behavior of these macroeconomic
indicators in other to control the trend of money supply.
The
Keynesians pointed out that, money supply and some macroeconomic indicators are
inversely related. The effect of inflation and interest rate on money supply in
Nigeria is a serious malady. For instance, a decision by the CBN to change the
monetary policy rate (MPR) affects the macroeconomic indicators in different
ways. When the bank makes an announcement on the MPR, it affects the
expectations of people and economic agents about the future direction of the
economy. Such decisions also affect the
prices of financial assets (like shares) and the exchange rate of the naira to
other currencies as well as the ability of people and economic agents to save
and spend money. For instance, when the
interest rate is increased, people are encouraged to save instead of spend
their money. An increase in interest
rate would also lead to foreigners paying more to buy our local currency,
thereby making foreign goods to be cheaper than goods produced in the country,
and vice versa. Also, the change in
interest rate could generate an indirect effect on the prices of goods and
services which compete with goods that are domestically produced or those goods
and services that use imported raw materials.
Consequently, a change in interest rate has effect on the component of
the general price level of those goods that are imported and this affect money
supply.
Prior
studies on the link between macroeconomic indicators and money supply in
Nigeria are few with only the work by Ifionu & Akinpelumi (2015) known to
the researcher at the time. Most of the studies on macroeconomic variables are
based on their effects on stock market return, economic growth and investment
dynamics in Nigeria (see, Ubaka, 2016; Musa, Usman & Zoramawa, 2014;
Adaramola, 2011). Consequently, this study was carried out to augment existing
literature on the issued associated with money supply and macroeconomic
indicators in Nigeria. By the time this study is completed, discoveries therefrom will
assist to resolve problems caused by volatility of macroeconomic indicators on
money supply in an emerging economy like Nigeria in the West African
sub-region.
1.3 Objectives
of the Study
The broad objective of this study is
to investigate the influence of macroeconomic indicators on money supply in
Nigeria. The specific objectives of this research work are:
1)
To analyze the influence
of interest rate on broad money supply in Nigeria.
2)
To examine the influence
of inflation rate on broad money supply in Nigeria.
3)
To investigate the
influence of nominal exchange rate on broad money supply in Nigeria.
4)
To ascertain the
influence of GDP growth rate on broad money supply in Nigeria.
1.4 Research Questions
The questions this research intends
to answer are as follows:
1)
What is the influence of
interest rate on broad money supply in Nigeria?
2)
To what extent does
inflation rate influence broad money supply in Nigeria?
3)
How does nominal exchange
rate influence broad money supply in Nigeria?
4)
What is the influence of
GDP growth rate on broad money supply in Nigeria?
1.5 Research Hypotheses
The hypotheses tested in the course
of this research work are:
H01: Interest rate does
not have a significant influence on broad money supply in Nigeria.
H02: Inflation rate does
not have a significant influence on broad money supply in Nigeria.
H03: Nominal exchange rate does
not have a significant influence on broad money supply in Nigeria.
H04:
GDP growth rate does not have a significant influence on broad money supply in
Nigeria.
1.6 Scope and Limitation of the Study
This
study will only focus on investigating the influence of macroeconomic variables
on money supply in Nigeria and shall be restricted to the period between 1990
and 2016. The choice of this period is to enable us focus strictly on the era
of market-based monetary regime in Nigeria. The main limitation of the study
was the difficulty in obtaining accurate data. The data used for the study are
the publications of the central bank of Nigeria (CBN) and which in most cases
usually run conflict with data obtained from other sources.
1.7 Significance of the Study
Among the importance of this thesis
is that it evaluates the stability macroeconomic indicators which could help to
determine money supply. Moreover, the study will also provide vital information
that could help in tracking macroeconomic variables. This is essential because
it will help in assessing the influence of macroeconomic indicators (such as,
interest rate, inflation rate, and nominal exchange rate and GDP growth rate)
in the Nigeria. Specifically, the study will be beneficial to the following
groups:
1. Monetary
authorities: Nigeria is presently overwhelmed
with huge savings gap that have prompted increasing external borrowing. Hence,
this study will help bring policy makers back to the issues that need to be
addressed in order to foster money supply in Nigeria.
2. Investors:
This research work will go a
long way to cater for the yearning needs and aspirations of domestic investors
as touching the need for money supply in Nigeria.
3. Researchers:
The current research study will contribute
to existing literature on macroeconomic indicators and money supply in Nigeria.
As such researchers can make reference to it for further research
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