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Transmission Mechanism from Money Supply to Inflation in Nigeria

Received: 11 August 2015    Accepted: 06 September 2015    Published: 24 September 2015
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Abstract

This paper seeks to establish the transmission mechanism from money supply to inflation in Nigeria in order to resolve the controversy of whether money supply or interest rate should be a target of monetary policy. In doing this, a recursive vector autoregression (VAR) model is employed using data from first quarter 2000 to fourth quarter 2013. The response of CPI to money supply ranges from zero to 0.014. The response of interest rate to money supply ranges from -0.094 to 0.021. The response of exchange rate to CPI ranges from -0.007 to 0.013. The response of exchange rate to interest rate ranges from -0.004 to 0.003. The response of CPI to exchange rate ranges from -0.002 to 0.010. The positive and significant responses of CPI to money supply and exchange rate to CPI indicate that the impact of the change in money supply is transmitted to inflation in Nigeria through the money-price link. The insignificant response of exchange rate to interest rate shows that the impact of the change in money supply is not transmitted to inflation in Nigeria through the money-interest link. The target of monetary policy should be the money supply and not interest rate.

DOI 10.11648/j.eco.20150406.11
Published in Economics (Volume 4, Issue 6, December 2015)
Page(s) 98-105
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Transmission Mechanism, Money Supply, Inflation, Impulse Response

References
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[3] Adesoye, A. B. (2012), “Price, Money and Output in Nigeria: A Cointegration-Causality Analysis”, African Journal of Scientific Research, Vol. 8, No. 1.
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[5] Akinbobola T. O. (2012), “The Dynamics of Money Supply, Exchange Rate and Inflation in Nigeria”, Journal of Applied Finance and Banking, Vol. 2, No. 4, 117 - 141, Scienpress Ltd.
[6] Al-Fawwaz T. M. and K. M. Al-Sawai’e (2012), “Output, Money, and Prices: The Case of Jordan”, International Business Research, Vol. 5, No. 12, Canadian Center of Science and Education.
[7] Bozkurt C. (2014), “Money, Inflation and Growth Relationship: The Turkish Case”, International Journal of Economics and Financial Issues, Vol. 4, No. 2, pp. 309-322.
[8] Chamberlin, G. and L. Yueh (2006), Macroeconomics, UK: Thompson Learning.
[9] Dickey, D. A. and W. A. Fuller (1979), “Distribution of the Estimators for Autoregressive Time Series with a Unit Root”, Journal of the American Statistical Association, 74, p. 427-431.
[10] Friedman, M. (1956), Studies in the Quantity Theory of Money, University of Chicago Press, Chicago.
[11] Friedman, M. (1956), the Quantity Theory of Money: A Restatement, In Friedman, M. (Ed.), Studies In the Quantity Theory of Money, University of Chicago Press, Chicago.
[12] Johansen, S. (1988), “Statistical Analysis of Co-integrating Vectors”, Journal of Economic Dynamics and Control, 12, pp. 231-54.
[13] Koyuncu F. T. (2014), “Causality Network between Budget Deficit, Money Supply and Inflation: An Application to Turkey”, International Journal of Business and Social Science Vol. 5, No. 10(1), Center for Promoting Ideas, USA.
[14] Mbongo J. E.; F. Mutasa and R. E. Msigwa (2014), “The Effects of Money Supply on Inflation in Tanzania”, Economics, 3(2): 19-26, Science Publishing Group.
[15] Mbutor O. M. (2014), “Inflation in Nigeria: How Much is the Function of Money?” Journal of Economics and International Finance, Vol. 6(1), pp. 21 - 27.
[16] Odiba E. O.; A. S. Apeh and E. J. Daniel (2013), “Money Supply and Inflation in Nigeria, 1986-2009”, Journal of Business and Organizational Development, Volume 5, Number 1.
[17] Olorunfemi S. and P. Adeleke (2013), “Money Supply and Inflation in Nigeria: Implications for National Development”, Modern Economy, 4, 161-170, Scientific Research.
[18] Omanukwue P. N. (2010), “The Quantity Theory of Money: Evidence from Nigeria”, Central Bank of Nigeria Economic and Financial Review, Volume 48/2.
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Author Information
  • Department of Economics, Faculty of Social Sciences, Kogi State University, Anyigba, Nigeria

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    Mathias A. Chuba. (2015). Transmission Mechanism from Money Supply to Inflation in Nigeria. Economics, 4(6), 98-105. https://doi.org/10.11648/j.eco.20150406.11

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    Mathias A. Chuba. Transmission Mechanism from Money Supply to Inflation in Nigeria. Economics. 2015, 4(6), 98-105. doi: 10.11648/j.eco.20150406.11

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    Mathias A. Chuba. Transmission Mechanism from Money Supply to Inflation in Nigeria. Economics. 2015;4(6):98-105. doi: 10.11648/j.eco.20150406.11

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  • @article{10.11648/j.eco.20150406.11,
      author = {Mathias A. Chuba},
      title = {Transmission Mechanism from Money Supply to Inflation in Nigeria},
      journal = {Economics},
      volume = {4},
      number = {6},
      pages = {98-105},
      doi = {10.11648/j.eco.20150406.11},
      url = {https://doi.org/10.11648/j.eco.20150406.11},
      eprint = {https://download.sciencepg.com/pdf/10.11648.j.eco.20150406.11},
      abstract = {This paper seeks to establish the transmission mechanism from money supply to inflation in Nigeria in order to resolve the controversy of whether money supply or interest rate should be a target of monetary policy. In doing this, a recursive vector autoregression (VAR) model is employed using data from first quarter 2000 to fourth quarter 2013. The response of CPI to money supply ranges from zero to 0.014. The response of interest rate to money supply ranges from -0.094 to 0.021. The response of exchange rate to CPI ranges from -0.007 to 0.013. The response of exchange rate to interest rate ranges from -0.004 to 0.003. The response of CPI to exchange rate ranges from -0.002 to 0.010. The positive and significant responses of CPI to money supply and exchange rate to CPI indicate that the impact of the change in money supply is transmitted to inflation in Nigeria through the money-price link. The insignificant response of exchange rate to interest rate shows that the impact of the change in money supply is not transmitted to inflation in Nigeria through the money-interest link. The target of monetary policy should be the money supply and not interest rate.},
     year = {2015}
    }
    

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  • TY  - JOUR
    T1  - Transmission Mechanism from Money Supply to Inflation in Nigeria
    AU  - Mathias A. Chuba
    Y1  - 2015/09/24
    PY  - 2015
    N1  - https://doi.org/10.11648/j.eco.20150406.11
    DO  - 10.11648/j.eco.20150406.11
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    JO  - Economics
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    EP  - 105
    PB  - Science Publishing Group
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    UR  - https://doi.org/10.11648/j.eco.20150406.11
    AB  - This paper seeks to establish the transmission mechanism from money supply to inflation in Nigeria in order to resolve the controversy of whether money supply or interest rate should be a target of monetary policy. In doing this, a recursive vector autoregression (VAR) model is employed using data from first quarter 2000 to fourth quarter 2013. The response of CPI to money supply ranges from zero to 0.014. The response of interest rate to money supply ranges from -0.094 to 0.021. The response of exchange rate to CPI ranges from -0.007 to 0.013. The response of exchange rate to interest rate ranges from -0.004 to 0.003. The response of CPI to exchange rate ranges from -0.002 to 0.010. The positive and significant responses of CPI to money supply and exchange rate to CPI indicate that the impact of the change in money supply is transmitted to inflation in Nigeria through the money-price link. The insignificant response of exchange rate to interest rate shows that the impact of the change in money supply is not transmitted to inflation in Nigeria through the money-interest link. The target of monetary policy should be the money supply and not interest rate.
    VL  - 4
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