




































 American Finance & Banking Review; Vol. 2, No. 1; 2018 

                   ISSN 2576-1226  E-ISSN 2576-1234 

                        Published by Centre for Research on Islamic Banking & Finance and Business 

 

 

 

54 
 

Money Supply and Inflation: Disaggregated Time Series Evidence 

from Nigeria 
 

Nwonodi Daniel Ikezam1 

 

1Department of Banking and Finance, Rivers State University, Port Harcourt, Nigeria, Nigeria. 

Correspondence: Department of Banking and Finance, Rivers State University, Port Harcourt, Nigeria, Nigeria 
 

 

Received: January 20, 2018            Accepted: January 26, 2018                 Online Published: February 7, 2018   

 

 

Abstract 

This paper examined money supply and inflation in Nigeria. The objective was to examine the extent to which 

components of money supply affect Nigerian inflation rate. Time series data was sourced from Central Bank of 

Nigeria (CBN) statistical bulletin and Stock Exchange Factbook. Nigerian Real Inflation Rate was proxy for 

dependent (INFR) variables while Currency in Circulation (CR), Demand Deposit (DD), Time Deposit (TD), 

Savings Deposit (SD) and Net Foreign Asset (NFA) were used as independent variables. The Ordinary Least Square 

(OLS) method of cointegration, Augmented Dickey Fuller Unit Root, Granger Causality was used as data analysis 
techniques. Regression result in the study shows that Currency in Circulation, Demand Deposit and Savings Deposit 

has negative relationship while Net Foreign Asset and Time Deposit have positive relationship with inflation. The 

Augmented Dickey Fuller Test proved non stationarity of the variables at level except Net Foreign Asset but 

stationary at first difference. The Granger Causality Test reveals no casual relationship running through the 

variables. The cointegration proved no long run relationship between the dependent and independent variables. The 

study conclude that Money Supply have significant relationship with Nigerian Inflation Rate. It therefore 

recommends effective management of money supply by the monetary authorities to achieve the monetary policy 

objectives of price stability.  

 

Keywords: Money Supply, Inflation, Currency in Circulation, Demand Deposit, Saving Deposit. 

 

1. Introduction 

Money supply is an instrument of monetary authorities used to fine-tune the economy to achieve desired 

macroeconomic goals. In Nigeria, Central Bank of Nigeria Decree 1969 as amended empowered CBN the monetary 

function of regulating the volume of money in circulation which is influenced by the economic condition, when the 

economy is inflationary the monetary authority reduces money supply to achieve price stability. However, when the 

economy is depressed, the monetary authorities increase the decline of money in circulation. This process is the so-

called expansionary and contractionary monetary policy. From the classical perspective, inflation is a monetary 

issue and can only be controlled by reduction in monetary circulation.   

Inflation remains one of the major economic variables that can distort economic activities in both develop and less 

develop countries. Although it has been argued that moderately rising prices (single digit inflation) initially activates 

the level of economic activities (Adeoye 2002), continuous inflation however, is evil to any economy. At the micro-

level, it arbitrarily redistributes income, wipes out savings, erodes real income (fixed income earners), leads to price 
distortions and it brings about misallocation of economic resources at the aggregate level (Adeoye 2002). Thus, 

understanding the factors driving inflation is very vital for the formulation and implementation of appropriate 

macroeconomic policies.  

The monetarist led by Milton Friedman believes that inflation is always and everywhere a monetary phenomenon. 

The argument on factors that determines inflation has long been examined and dates back to the divergences 

between the classical and the Keynesians economist. This argument has been deepened in a developing economy 

like Nigeria where the financial market is emerging and cannot absorb the financial contagion of the economic units. 

For instance, an empirical examination of Nigerian savings reveals that significant proportion of money supply is 

outside the banking system. This means there is excess money in circulation which is sensitive to inflation. Again, 

there is also mis-match of monetary policy with fiscal policy in the developing country like Nigeria, for instance 



 
 

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55 
 

monetary policy can be contractionary while fiscal policy can be expansionary. The divergences between the two 

schools of thought have attracted academic attentions. From the above, this study intends to examine the relationship 

between money supply and Nigerian inflation rate. 

2. Literature Review 

2.1 Theoretical Framework 
The monetarists, following from the Quantity Theory of Money (QTM), have propounded that the quantity of 

money is the main determinant of the price level, or the value of money, such that any change in the quantity of 

money produces an exactly direct and proportionate change in the price level. The QTM is traceable to Irving 

Fishers famous equation of exchange: MV=PQ, where M stands for the stock of money; V for velocity of circulation 

of money; Q is the volume of transactions which take place within the given period; while P stands for the general 

price level in the economy. Transforming the equation by substituting Y (total amount of goods and services 

exchanged for money) for Q, the equation of exchange becomes: MV=PY. The introduction of Y provides the 

linkage between the monetary and the real side of the economy. In this framework, however, P, V, and Y are 

endogenously determined within the system. The variable M is the policy variable, which is exogenously determined 

by the monetary authorities.  

The monetarists emphasized that any change in the quantity of money affects only the price level or the monetary 

side of the economy with the real sector of the economy totally insulated. This indicates that changes in the supply 
of money do not affect the real output of goods and services, but their values or the prices at which they are 

exchanged only. An essential feature of the monetarists’ model is its focus on the long-run supply-side properties of 

the economy as opposed to short-run dynamics (Dornbush, et al, 1996). 

The Keynesian opposed the monetarists’ view of direct and proportional relationship between the quantity of money 

and prices. According to this school, the relationship between changes in the quantity of money and prices is non-

proportional and indirect, through the rate of interest. The strength of the Keynesian theory is its integration of 

monetary theory on the one hand and the theory of output and employment through the rate of interest on the other 

hand. Thus, when the quantity of money increase, the rate of interest falls, leading to an increase in the volume of 

investment and aggregate demand, thereby raising output and employment. In other words, the Keynesians see a link 

between the real and the monetary sectors of the economy an economic phenomenon that describes equilibrium in 

the goods and money market (IS-LM). Equally important about the Keynesian theory is that they examined the 
relationship between the quantity of money and prices both under unemployment and full employment situations. 

Accordingly, so long as there is unemployment, output and employment will change in the same proportion as the 

quantity of money, but there will be no change in prices. At full employment, however, changes in the quantity of 

money will induce a proportional change in price. The neo-Keynesian theoretical exposition combines both 

aggregate demand and aggregate supply. It assumes a Keynesian view on the short-run and a classical view in the 

long-run.  

The simplistic approach is to consider changes in public expenditure or the nominal money supply and assume that 

expected inflation is zero. As a result, aggregate demand increases with real money balances and, therefore, 

decreases with the price level. The neo-Keynesian theory focuses on productivity, because, declining productivity 

signals diminishing returns to scale and, consequently, induces inflationary pressures, resulting mainly from over-

heating of the economy and widening output gap. But by and large, the theories outlined above by various schools of 

thought in economics provide a better understanding of the position of inflation as a macroeconomic variable in the 
mainstream economic thought and its effect on the overall performance of the economy. Among all the theories, the 

monetarist theory is adopted because its proposition fairly satisfied the realities of the projected causes of 

inflationary pressure in Nigeria. 

2.2 Empirical Literature   

Omoke et, al,(2010) tested the causal long term relationship between budget deficit, money growth and inflation in 

Nigeria and the result of the study pointed to a close long term relationship between inflation and money supply. 

Another important issue arising from the foregoing is the link between inflation on one hand and market interest rate 

on the other. Perceptual inflation generates expectations about the cause of factored prices and puts on upward bias 

on market interest rates as lenders seek to protect the real value of their funds. It is important to point out that the 

long term positive effect of money stock changes on output is generally considered to be tenuous. Thus, the main 

long term effect of excessive money stock growth appears to be negative, that is a sustained rise in the price level. 
Long term growth is generally considered to depend on real factors such as resources endowments, technology, and 

high productivity and inter- temporal choices between present and future consumption. 



 
 

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Nwaobi (2002) used data from 1960 through 1995 and the Johansen co-integration framework found that money 

demand, real GDP, inflation and interest rate are co integrated in Nigeria. He also found stable money demand in the 

period under study.  

Fatukasi (2004) investigated the determinants of inflation in Nigeria between 1981 and 2003. The study made use of 

non-linear multiple regression models. He posited that the causes of inflation in Nigeria are multi-dimensional and 
dynamic, requiring full knowledge at any point in time to be able to proffer solutions to the inflationary trends in the 

country. 

Omokeet et al., (2010) tested the causal long-term relationship between budget deficit, money growth and inflation 

in Nigeria. Augmented Dickey-Fuller (ADF) and Philip-Perron (PP) test were carried out to test the stationarity of 

the variables used. The result of the study pointed to a close long-term relationship between inflation and money 

supply. 

Olusanya (2009) analyzed the main sources of fluctuations in inflation in Nigeria. Using the framework of error 

correction mechanism (ECM) it was found that the lagged CPI, expected inflation, petroleum prices and real 

exchange rate significantly propagate the dynamics of inflationary process in Nigeria. 

Bakare (2011) conducted a study on the determinants of money supply growth and its implications on inflation in 

Nigeria. The study employed quasi-experimental research design approach. The results showed that credit expansion 

to the private sector determines money supply growth and inflation in Nigeria. He therefore concluded that changes 
in money supply are concomitant to inflation in Nigeria. 

Marta et al. (2004), examines monetary policy in Albania during the transition period. Estimates from a vector Auto 

Regression Model (VAR) of key macroeconomic variables which include money growth, inflation, exchange rate, 

remittances and the trade balance, demonstrate the weak link between money supply and inflation up to mid 2000. 

They conclude that exchange rate stability has played a key role in keeping inflation low for most of the transition 

period, and that the range of monetary policy instruments available to the authorities has widened in recent years and 

this has been associated with more stable and predictable changes in money supply and the price level. The result 

demonstrates that Albania has come a long way in terms of controlling inflation, liberalizing Akinbobola financial 

markets and improving the predictability of inter-relations among key macroeconomic variables.  

Holod (2000) explores the identified vector autoregression to model the relationship between CPI, money supply 

and exchange rate in Ukraine. The results show that exchange rate shocks significantly influence price level 
behaviour. Further, the study also found that money supply responds to positive shocks in price level. The study 

contributes to the sizable literature on IT using overly sophisticated vector error correction model with complex 

identification structure. There is however an element of data mining in the generation of impulse response functions.  

Nicolleta and Edward (2001), updates and extends Friedman’s (1972) evidence on the lag between monetary policy 

actions and the response of inflation. Their evidence is based on UK and US data for the period 1953-2001 on 

money growth rates, inflation and interest rates, as well as annual data on money growth and inflation. Their 

findings reaffirm the result that it takes over a year before monetary policy actions have their peak effect on 

inflation.  

Novoseletska (2004) discussed this issues taking note of the break point in the statistical relationship. In a more 

recent period of financial stability (1999-2003) rising monetary aggregate were accompanied by falling inflation and 

a rebound of output. Novoseletska and Myhaylychenko (2004), note that nominal exchange rate stability could 

contribute to moderate growth rates of prices during the last few years.  
Clemens and Alex (2002) empirically estimated and tested the relationship between exchange rate accommodation 

and the degree of inflation persistence using a non-linear autoregressive inflation equation for ten European 

countries for the period 1974 to 1998. In the estimation procedure they allow for the presence of an unknown 

number of shifts in the mean of inflation. Their results provide supportive evidence for the existence of a positive 

link between exchange rate accommodation and inflation persistence for most of the smaller and more dependent 

exchange rate mechanism (ERM) countries, even when mean level shifts in inflation are appropriately accounted 

for. For the larger countries and the countries that remained outside the ERM for most of the period they find hardly 

any evidence of such positive link. Overall, their results provide modest support for the existence of the theoretically 

hypothesized positive link between exchange rate accommodation and inflation persistence.  

Bleaney (2000) implicitly recognizes that at least two problems arise from the literature. First, the identification of 

periods within which persistence is constant using the prevailing exchange rate regime is generally inappropriate. 
The dynamics of money supply, exchange rate and inflation in Nigeria variation in persistence within constant 

regime periods to independent changes in the main level of inflation, which is questionable as well.  

Bernhardsen and Holmsen (2005) discussed whether inflation forecasts should be based on technical exchange rate 

assumptions like a constant exchange rate and uncovered interest rate parity (UIP) or on assumptions reflecting the 



 
 

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central bank’s best prediction of future exchange rate movements. Because of the strong link between the interest 

rate and the exchange rate, the exchange rate does not principally differ from other variables that are endogenous in 

inflation projections.  

Debelle and Galati (2005) argued that along with changes in output growth, exchange rate changes have historically 

played a key role in the adjustment of external imbalances in industrial countries. Zettelmeyer (2004), and Kearns 
and Manners (2005) finds that, a surprise monetary policy shock that increases the interest rate has a significant 

appreciating effect on the exchange rate. As Frankel (1999) observes, fixing the exchange rate has the advantage of 

providing an observable commitment to monetary policy.  

Atkenson and Kehoe (2001) believed that fixing the exchange rate has the advantage of providing an observable 

commitment to monetary policy. They formalize the argument that because it is more transparent, the exchange rate 

has a natural advantage as an instrument for monetary policy.  

Bleaney (2001) asserts that there has been stronger monetary policy response to inflation shocks in recent decades. 

He finds that monetary growth in the United.Mahamadu and Philip (2003) explore the relationship between 

monetary growth, exchange rates and inflation in Ghana using Error Correcting Mechanism. The empirical result 

confirms the existence of a long run equilibrium relationship between inflation, money supply, exchange rate and 

real income. In line with theory, the findings demonstrate that in the long-run, inflation in Ghana is positively related 

to the money supply and the exchange rate, while it is negatively related to real income. Elsewhere, several authors 
have been pre-occupied with the factors determining inflation, especially in the last few years. 

Canetti and Greene (2000) separated the influence of monetary growth from exchange rate changes on prevailing 

and predicted rates of inflation. The sample covers ten African countries: The Gambia, Ghana, Kenya, Nigeria, 

Sierra-leone, Somalia, Tanzania, Uganda, Zaire, and Zambia. Using the Vector auto regression analysis, they 

suggest that monetary dynamics dominate inflation levels in four countries, while in three countries; exchange rate 

depreciations are the dominant factor.  

Rutasitara (2004) investigates the influence of exchange rates on inflation in Tanzania. Model estimation lend 

support to the structural view of inflation and show a high degree of persistence as the current rate reflects about 0.6 

of its value four quarters back. The study contributes to the debate on the controversies about the relative role of 

exchange rates in discussion of Structural Adjustment Programmes (SAP) and stabilization policies.  

Bozkurt (2014) examines money, inflation and growth relationship in Turkey by using co-integration test. For this 
purpose, quarterly data of money supply (M2), GDP, velocity of money and deflator are used for the period of 

1999:2 – 2012. According to the results from this paper, money supply and velocity of money are the main 

determinants of inflation in the long run in Turkey. On the other hand, 1% decreases in income directly reduces 

inflation by 1%.  

Koyuncu (2014) uses the time-series approach to investigate the impact of budget deficit and money supply on 

inflation in Turkey for the period of 1987-2013. He finds that while there is no causality from inflation to money 

supply, there is causality from money supply to inflation in Turkey.  

Al-Fawwaz and Al-Sawai’e (2012) analyze the short run relationship between money, the price, and the gross 

domestic product (GDP) growth for the Jordanian economy. Time series methods are used for the annual data for the 

period 1976-2009. The result indicates that there is a causal relationship from money supply to inflation, with low 

degree of 0.21.  

Mbongo, Mutasa and Msigwa (2014) examine the effects of money supply on inflation in Tanzania. The study 
applies OLS, VAR and ECM techniques to examine the effect of selected variables on inflation in Tanzania. OLS 

and ECM results show that money supply and exchange rate have significant impact on inflation in the short and 

long run. The VAR findings indicate that the current inflation can be influenced by the past state inflation.  

Abate and Nandeeswara (2015) show the causality effect between money supply growth and price level in Ethiopia 

using a co-integrated vector auto regressive (VAR) model over the period 1975 to 2012. To explore the short-run 

direction of causality between money supply and consumer price index (CPI), Granger causality test has been 

applied and in order to investigate the existence of long-run relationship, co-integration analysis has been employed. 

The causation runs from money supply to prices, but price level does not causes money supply. The co- integration 

analysis established that money supply and CPI are found to be co-integrated suggesting an existence of long-run 

relationship.  

Ahmed and Suliman (2011) examined the long-run relationships between real gross domestic product (GDP), money 
supply (MS) and price level (CPI)) for the Sudan economy using annual data for the period of 1960 to 2005. To 

explore the short-run direction of causality between GDP, MS and CPI, Granger causality test has been applied and 

in order to investigate the existence of long-run relationship, co-integration analysis has been employed. The 

causation runs from money supply to prices, but price level does not causes money supply. The co-integration 



 
 

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analysis established that the real GDP, money supply and CPI are found to be co integrated suggesting an existence 

of long-run relationship.  

Mbutor (2014) determines the exact portion of the changes that occur in aggregate prices that could be attributed 

exclusively to the growth in money supply in Nigeria for the period of 1970 to 2012. The gross domestic product, 

nominal exchange rate, and the maximum lending rate are control variables, while inflation, proxy by the consumer 
price index and broad money supply are focus variables. All variables enter in logarithm forms, except interest rate. 

The impulse response function shows a persistent positive relationship between inflation and money supply. The 

variance decomposition of inflation shows that money supply accounts for up to 34.5 percent of aggregate price 

changes until the tenth period.  

Olorunfemi and Adeleke (2013) examine money supply and inflation rate in Nigeria for the period of 1970-2008. 

The study uses vector auto regressive (VAR) model. Results from the causality test indicate that there exists a 

unidirectional causality between money supply and inflation rate. The causality test runs from money supply to 

inflation.  

Umeora (2010) examines the effects of money supply (M2) and exchange rates on inflation in Nigeria for the period 

of 1982 to 2009 using annual data. The data are analyzed using multiple regression analysis (with SPSS). The results 

show that money supply and exchange rate have positive and negative effects on inflation in Nigeria respectively. 

The two variables account for only about 12% of the variation of inflation in Nigeria.  
Odiba, Apeh and Daniel (2013) investigate the effect of money supply and aggregate demand on inflation in Nigeria 

for the period of 1986-2009. The data are analyzed using ordinary least square regression. The results show that 

money supply and aggregate demand are the main determinants of inflation in Nigeria during the review period.  

Akinbobola (2012) aims at providing quantitative analysis of the dynamics of money supply, exchange rate and 

inflation in Nigeria. The sample covers quarterly data from 1986:01 to 100 Mathias A. Chuba: Transmission 

Mechanism from Money Supply to Inflation in Nigeria 2008. The model was estimated using vector error correction 

mechanism (VECM). The empirical results show that in the long run, money supply and exchange rate have 

significant inverse effects on inflationary pressure in Nigeria.  

Omanukwe (2010) examines the modern quantity theory of money using quarterly time series data in Nigeria for the 

period 1990:1-2008:4. The Granger causality is used to examine the causality between money and prices. The result 

shows the weak unidirectional causality from money supply to core consumer prices in Nigeria.  
Adesoye (2012) examines the co-integration causality between prices, monetary aggregate and real output in Nigeria 

from the period 1970 to 2009 using the inflationary gap model that emanates from the quantity theory of money. 

The causality is found to significantly run from money supply to price. The econometric findings suggest that 

inflation in Nigeria is a monetary phenomenon.  

Yahya (2000) concluded in his work that despite the distorting effects of a civil war followed by an oil commodity 

boom and burst, Nigeria’s inflationary experience could be traced ultimately to excessive monetary growth. The 

dynamics of money supply, exchange rate and inflation in Nigeria macroeconomic accounting framework, he 

developed a framework for analyzing Nigeria’s inflationary experience, and found that any adjustment policy that 

does not take into account the role of money and credit is likely to fall short of the overall goal of non-inflationary 

economic growth.  

Odusola and Akinlo (2001) examined the link between the naira depreciation, inflation and output in Nigeria, 

adopting Vector Autoregression (VAR) and its structural variant. Their results tend to suggest that the adoption of 
flexible exchange rate system does not necessarily lead to output expansion, particularly in the short-term. Issues 

such as discipline, confidence and credibility on the part of the government (as argued by Dordunoo and Njinkeu, 

1997) are essential. Evidence from impulse response functions and structural VAR models suggested that the 

impacts of the lending rate and inflation on the output were negative. While most previous studies focus more on the 

determinants of inflation, using explanatory variables, ours deviates by adopting the Vector Error Correction 

Mechanism (VECM) which eliminates the need to develop explicit economic models and thus impose apriori 

restrictions on the relationships among variables, VECM analysis permits a more general test of causation among 

different economic variables than is possible in conventional econometric analysis.  

3. Research Methodology  

This study intends to examine the impact of money supply on inflation rate in nigeria. The relevant data was sourced 

from Central Bank of Nigerian Statistical Bulletin. Time series data were used and econometric method of data 
analyses which involves Ordinary Least Square (OLS) were employed. The multiple regressions formulated in this 

study is based on the theory of money supply and inflation rate.  

INFR= f (CR, DD, SD, TD, NFA) …………………………………. (1) 

Transforming equation 1 above to econometric method, we have: 



 
 

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INFR = β0 + β1CR + β2DD+ β3SD + β4TD + β5NFA +µ ………… (2) 

Where: 

INFR  = Nigerian Inflation Rate  

CR  = Currency in Circulation  

DD  = Demand Deposit 
SD  = Savings Deposit 

TD  = Time Deposit 

NFA  = Net Foreign Asset  

µ  = Error Term 

β1 – β5   = Coefficient of Independent Variables to the Dependent Variable 

β0  = Regression Intercept 

 

3.1 Estimation Techniques 

3.1.1 Stationarity Test 

Time series data are assumed to be non-stationary and this implies that the result obtained from Ordinary Least 

Square (OLS) may be misleading (Suleman and Azeeze, 2012). It is therefore necessary to test the stationarity of the 

variables using the Augmented Dickey Fuller 1979 test to both level and first difference. The ADF test constructs a 
parameter correction for higher order correlation by assuming the times series follows an auto regressive process. 

Mathematically expressed as 

yt = c + βt + αyt-1 +  



 jt

k

it

j y   εt ………………………………….3 

yt = c + αyt-1 +  



 jt

k

it

j y   εt ……………………………………….4 

Equation 1 is used to test for the null hypotheses of non stationarity of unit root against trend stationaerity alternative 

in Yt where y refers to the examined time series.  Equation 2 tests the null hypotheses of a unit root against a mean 

stationarity alternative. 

3.1.2 Johansen Cointegration Test 

The cointegration test established whether a long run equilibrium relationship exist among the variables. It is 
generally accepted that to establish a cointegration, the likelihood ratio must be greater than the Mackinnon critical 

values. The model can be stated as  

2211 ttt XXX    + …+ 11   pX tp …………5 

Where   is a constant term. 

tX  Represents the first cointegrating differences 

3.1.3 Granger Causality 

To determine the direction of causality between the variables, the study employed the standard Granger causality 

test (Granger, 1969). The test is based on Vector Error Correction Model (VECM) which suggests that while the 

past can cause or predict the future, the future cannot predict or cause the past. Thus, according to Granger (1969) X 

Granger cause Y if past value of X can be used to the past value of Y, the test is based on the following regression 

model.  

 

 

 
 

 

 

 

 

 

 

 

3.1.4 Vector Error Correction Model 

)6(.................
1 1 1

2221

1

2

1

22    
  





 
k

j

k

j

k

j

jtjjtjjtjj

k

j

j

k

j

jtjt NFATDSDDDCRINFR

)7(....................
1 1 1

2221

1

2

1

22    
  





 
k

j

k

j

k

j

jtjjtjjtjj

k

j

j

k

j

jtjt NFATDSDDDINFRCR

)8(...................
1 1 1

2221

1

2

1

22    
  





 
k

j

k

j

k

j

jtjjtjjtjj

k

j

j

k

j

jtjt NFATDSDCRINFRDD

)9(.................
1 1 1

222

11

2

1

22    
  





 
k

j

k

j

k

j

jtjjtjjtj

j

k

j

j

k

j

jtjt NFATDDDCRINFRSD

)10(.................
1 1 1

222

11

2

1

22    
  





 
k

j

k

j

k

j

jtjjtjjtj

j

k

j

j

k

j

jtjt NFASDDDCRINFRTD

)11(.................
1 1 1

222

11

2

1

22    
  





 
k

j

k

j

k

j

jtjjtjjtj

j

k

j

j

k

j

jtjt TDSDDDCRINFRNFA



 
 

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60 
 

Co-integration is a prerequisite for the error correction mechanism. Since co-integration has been established, it is 

pertinent to proceed to the error correction model. The VECM is of this form: 

Ttyyy tt

j

i

jtt ,.....,1,1

1

1

1  





  
  

……………………..13 

Where Yt is a vector of indigenous variables in the model. α is the parameter which measures the speed of 

adjustment through which the variables adjust to the long run values and the β is the vectors which estimates the 

long run cointegrating relationship among the variables in the model.   is the draft parameter and is the matrix of 

the parameters associated with the exogenous variables and the stochastic error term. 

4. Results and Discussion 

To ascertain the dynamic relationship between the variable, the following tables gives an insight.  

4.1 Presentation of OLS Results 

Table 1: Regression Results 

Variable  Coefficient  Std.Error  T-Statistics  Probability  

INFR -0.128869 0.157710 -0.817125 0.4208 

CD -0.733564 0.711558 -1.030926 0.3114 

DD -2.391441 0.957630 -2.497250 0.0187 

SD 1.014112 0.746346 1.358769 0.1851 

TD 0.149095 0.119291 1.249841 0.2217 

NFA 97.13793 35.19558 2.759947 0.0101 

β0 0.128869 0.157710 -0.817125 0.4208 

R2 0.775921 - - - 

ADJ R2 0.646621 - - - 

F-STATISTICS 12.13390 - - - 

PROB. F 0.000653 - - - 

D.W 1.475208 - - - 

Source: Author’s computation from E-view 7.0 

4.1.1 Discussion of Results 

The regression results presented in the above table reveal the relationship between the dependent and the 

independent variable as formulated in the regression model. The model summary proxy by R2 and adjusted R2 

shows that 75.9% and 64.6% variation in Nigerian inflation rate is traceable to the component of money supply in 

the model. The F-statistics and the probability value of 12.933960 and probability of 0.000653 prove that the model 

is significant and fit to test the relationship between the dependent and the independent variables. The Durbin-

Watson statistics of 1.475208 is above 1.00 and less than 2.00 this shows that there is positive auto-correlation 

between the variables in the time series.  

The regression co-efficient shows that currency in circulation, demand deposit and time deposit has negative 
relationship with inflation. This finding is contrary to the classical opinion of inflation as a linear function of money 

supply but validate the Keynesian’s opinion that inflation is a linear function of deficiencies in components of 

aggregate demand. However, savings deposit and net foreign asset have positive relationship with Nigeria inflation 

rate. This finding is in line with the classical theory but contradict the Keynesians view. The probability value and 

the T-statistics shows that CR, DD and TD are statistically significant meaning that increase in the variable will 

significantly affect Nigerian inflation rate. 

Table 2: Presentation of ADF Test at Level 

Variable  ADF Statistics  Critical Values Prob. Order of Integration  

1% 5% 10% 

       

INFR -3.259192 -3.646342 -2.954021 -2.615817 0.0253 1(0) 

CR -3.946979 -3.653730 -2.957110 -2.617434 0.0048 1(0) 

DD -2.395771 -3.646342 -2.954021 -2.615817 0.1498 1(0) 

TD -3.654719 -3.646342 -2.954021 -2.615817 0.0098 1(0) 

SD -3.430947 -3.646342 -2.954021 -2.615817 0.0098 1(0) 

NFA -5.050256 -3.653730 -2.957110 -2.617434 0.0003 1(1) 

Source: Author’s computation from E-view 7.0 



 
 

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The above table indicates that at level the variables are not stationary except Net Foreign Asset as the ADF critical 

values are greater than the Mackinnon Critical Values at 1%, 5% and 10%. Therefore the null hypotheses of non-

stationarity are accepted while the alternate rejected.      

Table 3: ADF at First Difference 

Variable  ADF Statistics  Critical Values Prob. Order of Integration  

1% 5% 10% 

INFR -5.730629 -3.670170 -2.963972 -2.621007 0.0000 1(1) 

CR -6.559663 -3.670170 -2.963972 -2.621007 0.0000 1(1) 

DD -6.081278 -3.65370 -2.957110 -2.617434 0.0000 1(1) 

TD -6.222737 -3.661661 -2.960411 -2.619160 0.0000 1(1) 

SD -5.822923 -3.661661 -2.960411 -2.619160 0.0000 1(1) 

NFA -6.816334 -3.661661 -2.960411 -2.619160 0.0000 1(1) 

Source: Author’s computation from E-view 7.0 

From the above, all the variables are stationary at first difference, this means the null hypothesis of non-stationarity 

is rejected and the alternate accepted. 

Table 4: Granger Causality Test 

    
 Null Hypothesis: Obs F-Statistic Prob.  

     CR does not Granger Cause INFR  32  0.01574 0.9844 

 INFR does not Granger Cause CR  0.14977 0.8616 

     DD does not Granger Cause INFR  32  2.10282 0.1417 

 INFR does not Granger Cause DD  1.48405 0.2446 

     TD does not Granger Cause INFR  32  0.65479 0.5276 

 INFR does not Granger Cause TD  0.59059 0.5610 

     SD does not Granger Cause INFR  32  0.21831 0.8053 

 INFR does not Granger Cause SD  0.59035 0.5611 

     NFA does not Granger Cause INFR  32  1.94118 0.1630 

 INFR does not Granger Cause NFA  0.60173 0.5550 

    
From the granger causality results presented above, the probability coefficient of the variables are greater than the 

critical 0.05 at 5% level of significant and 95% confidence level, thereof the research conclude that there is no 

causal relationship among the variables.0 

Table 5: Cointegration Test Results (TRACETEST)  

Hypothesis CE Trace Statistics 0.05 Critical Value Probability Remark 

r=0  127.3628  95.75366  0.0001 Reject H0 

r≤1  67.62563  69.81889  0.0739 Accept H0 

r≤2  39.46516  47.85613  0.2422 Accept H0 

r≤3  21.61151  29.79707  0.3206 Accept H0 

r≤4  9.582501  15.49471  0.3142 Accept H0 

r≤5  2.631519  3.841466  0.1048 Accept H0 

Source: Author’s computation from E-view 7.0 
Table 6: Cointegration Test (Maximum Eigen Value)  

Hypothesis  Maximum Eigen Value 0.05 Critical Value Probability Remark 

r=0  59.73715  40.07757  0.0001 Reject H0 

r≤1  28.16047  33.87687  0.2062 Accept H0 

r≤2  17.85365  27.58434  0.5073 Accept H0 

r≤3  12.02901  21.13162  0.5448 Accept H0 

r≤4  6.950982  14.26460  0.4950 Accept H0 

r≤5  2.631519  3.841466  0.1048 Accept H0 

Source: Author’s computation from E-view 7.0 



 
 

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From the co integration results, the tables proved no co integrating equations among the variables. This means no 

long-run relationship that exists among the variables. This is contrary to the expectation of the results. It might be 

trace to effectiveness.    

 Table 7: Vector Error Correction Estimates     

       
Cointegrating Eq:  CointEq1 CointEq2     

       Error Correction: D(INFR) D(CR) D(DD) D(TD) D(SD) D(NFA) 

        R-squared  0.368850  0.719086  0.648876  0.522421  0.592807  0.536203 

 Adj. R-squared -0.183406  0.473287  0.341642  0.104539  0.236514  0.130380 

 Sum sq. resids  5792.695  1988.201  105.8568  535.7865  714.5933  13579.08 

 S.E. equation  19.02744  11.14731  2.572169  5.786765  6.682969  29.13232 

 F-statistic  0.667898  2.925502  2.111996  1.250165  1.663817  1.321274 

 Log likelihood -125.0578 -108.4826 -63.02265 -88.15820 -92.62185 -138.2627 

 Akaike AIC  9.035985  7.966617  5.033719  6.655368  6.943345  9.887917 

 Schwarz SC  9.729849  8.660482  5.727584  7.349232  7.637210  10.58178 

 Mean dependent  0.196774  0.051613  0.176774 -0.149032 -0.149355 -0.258710 

 S.D. dependent  17.49095  15.35972  3.170068  6.115227  7.648370  31.23996 

 Determinant resid covariance (dof adj.)  1.25E+10     

 Determinant resid covariance  2.37E+08     

 Log likelihood -562.8129     

 Akaike information criterion  42.89115     

 Schwarz criterion  47.60943     

       
The speed of adjustment of the variables is examined in the above table; the R2 of the variables indicates that the 

independent variables explained large variation of the dependent variables. This means the speed of adjustment is 
adequate. 

5. Conclusion and Recommendations 

This study examines the relationship between Money Supply and inflation in Nigeria, the independent variables 

comprises the components of Narrow and Broad Money Supply. The variables were sourced from publications. 

Findings revealed that Currency in Circulation, Demand Deposits, Savings Deposit have negative relationship with 

inflation rate while Net Foreign Assets and Savings Deposit have positive effect on inflation. The model summary 

shows that the independent variables can explain 75.5%; the F-statistics proved that the model is significant. The 

study therefore conclude that money supply have significant relationship with Nigerian inflation rate. It therefore 

makes the following recommendations: 

 The monetary authorities should device measures of managing the volume of money supply to avert its 

effect on inflation. 

 The financial market and institutions such as the banking institutions should be reformed and its 

efficiency enhanced to absorb through savings the volume of money supplied by the monetary 

authorities. 

 There is need to reform the savings rate to attract savings from the difference economic units and the 

monetary policy rate should be enhanced. 

 Monetary authorities should integrate the objective of money supply with inflation control to enhance 

the effectiveness of monetary policy in achieving price stability. 

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