ABSTRACT

The present work aimed at examining the determinants of money supply in Nigeria from 1970-2014. The data collected are secondary data from the Annual Report and Statement of Accounts and CBN Statistical Bulletin. The unit root test and Cointegration test, were carried out, and the model was estimated by OLS. The major findings is that Expected rate of inflation  is the major determinant of money supply in Nigeria, while inflationary rates was found to be an insignificant factor determining the level of money supply in Nigeria. Based on the findings of the study, the policy recommendation is that, for Government to control the level of money supply in Nigeria they should target the growth rate of money base and expected rate of inflation, so as to ensure stability in the money supply and also the achievement of monetary policy goals and objectives.

1.1              BACKGROUND OF THE STUDY

The concept of money supply and its determinants are very important in monetary theory and monetary policy formulation. Money as we know is very important in the economic process and influences general price levels, aggregate national income, output and productivity, the level of employment of labor and capital, exchange rates and balance of payments equilibrium. Thus, the study of money is crucial in appreciating the major influences on aggregate economic performance.Jhingan (2008).

The most relevant obstacle to economic development is the shortage of capital. This is the fact that Jhingan (2001) noted, that in an undeveloped country, the masses are poverty-ridden because there is low rate of savings which is essential for capital formation; and savings depend upon the size of income. The national output is low and so is the national income. The propensity to consume is very high and such small sums as they may be able to save are often hoarded in the form of currency or used in purchasing gold and jewelry etc., and the feeling to hoard money is due to the absence of banking facilities in undeveloped countries. This is the reason why there is scarcity of money supply in Nigeria.

To break this poverty circle, the Federal government creates efficient financial institutions aimed at improving the supply of currency and credit system in the country. More banks and financial institutions are set up to provide large credit facilities at a low rate and to divert voluntary savings into productive channels. However, there is the existence of a strong and powerful Central Bank which acts as the fiscal agent of the government and thus manages the public debt Jhingan (2001).

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