Money Supply and Economic Growth

Abstract

This study investigates the impact of key monetary policy variables on economic growth in Nigeria from 1982 to 2023, a period characterized by recurring inflationary pressures, exchange-rate instability, monetary regime shifts, and persistent macroeconomic imbalances. Against the backdrop of Nigeria’s long-standing struggle to achieve stable and sustainable output growth despite extensive monetary interventions, the research examines the distinct effects of broad money supply (M2), inflation rate (INFR), and interest rate (INTR) on real GDP growth. Employing an ex-post facto research design and annual secondary time-series data, the study utilizes the Autoregressive Distributed Lag (ARDL) bounds testing technique to explore both the long-run and short-run dynamics among the variables. The empirical findings reveal that broad money supply exerts a positive and statistically significant long-run effect on economic growth, indicating that liquidity expansion continues to play a central role in stimulating investment, credit creation, and aggregate demand in Nigeria. Conversely, inflation rate exhibits a positive but statistically insignificant relationship with growth, suggesting that price movements—driven largely by structural and imported inflation—have not been a primary determinant of long-run output fluctuations. Interest rate displays a negative but statistically insignificant long-run effect, reflecting the weak interest-rate transmission mechanism within Nigeria’s shallow financial markets and the limited responsiveness of real sector activities to lending conditions. The study concludes that while money supply serves as an important driver of long-run economic performance in Nigeria, both inflation and interest rate remain weak instruments for influencing growth due to structural rigidities, financial market limitations, and institutional inefficiencies. It therefore recommends policies aimed at improving monetary policy transmission, stabilizing the inflation environment, deepening financial market development, and strengthening credit allocation frameworks to ensure that monetary interventions translate effectively into sustained economic growth.