Open AccessMONEY SUPPLY AND INFLATION IN NIGERIA: THE MYTH OF THE MONETARIST THEORY OF INFLATION
Author(s) -
Ibrahim Abdulhamid Danlami,
Mohammad Helmi Hidthiir,
Sallahuddin Hassan
Publication year - 2020
Publication title -
journal of economics and sustainability
Language(s) - English
Resource type - Journals
ISSN - 2637-1294
DOI - 10.32890/jes2020.2.2.1
Subject(s) - monetarism , economics , money supply , inflation (cosmology) , keynesian economics , quantity theory of money , deflation , macroeconomics , distributed lag , short run , monetary policy , monetary economics , econometrics , physics , theoretical physics
The inability of Nigeria to make its inflation rate a single digit motivates this study. This paperaims to empirically investigate whether inflation is solely caused by the increase in moneysupply beyond what is required by the economy, as maintained by monetarists using Nigeriandata. Autoregressive Distributed Lag Model (ARDL) was used as the tool of econometricanalysis on Nigerian time series data for 48 years. The ARDL was chosen because unit roottests were conducted. The results show that variables are not integrated in the same order.Money supply increment is demonstrated to be inflationary only in the short-run. The existenceof other factors that influence inflation in the country is also evident. While money supply hasno significant influence on inflation, the GDP and the constant have a significant influence oninflation in the long-run. Therefore, justification is provided for the myth of monetarist theoryof inflation, claiming that money supply increment is a sole source of inflation, especially inNigeria. Even though the result of the Wald test shows that the coefficients of money supplycombined have a significant effect on inflation in conformity with the monetarist theoreticalarguments, such effects are limited to short-run only. The findings of the research are limitedto Nigeria whose data are used, based on ARDL as the econometrics techniques applied, for aperiod of 48 years from 1970–2017. Generally speaking, explanations for theories regardinginflation, especially in developing nations, should not be taken for granted. The researchempirically demonstrates that the monetarist theory of inflation is a myth and not reality byusing Nigerian data. It also suggests that other theories should be empirically tested to checkwhich one best explain the nature of inflation dynamics in a country to proffer a better solutionto a high inflation rate problem.