Background of the Study
In the recent year the relationship between money supply and economic growth has been receiving increasing attention than any subject matter in the field of monetary economics. Economists differ on the impact of money supply on economic growth, while some agreed that variations in the quantity of money is the most important determinant of economic growth and that countries that devote more time to studying the behavior of aggregate money supply experiences much variations in their economic activities (Asogu, 1998), others are skeptical about the role of money on gross national income (Domigo, 2001). In the view of Steve (1997) financial markets start growing as the economy approaches the intermediate stage of the growth process and develop once the economy becomes matured. This connotes that economic growth stimulates increased financial development. He explains that there may not be possibility of economic growth without an appropriate level of money supply, credit and appropriate financial conditions in general.
Evidence has shown that since 1970 and mid of 1980 some relationship exist between the stock of money and economic growth or economic activity in Nigeria. Over the years, Nigeria has been controlling her economy through variations in her stock of money. Consequent upon the effect of the collapse of oil price in 1981 and the balance of payment (BOP) deficit experienced during this period, various methods of stabilization ranging from fiscal to monetary policy were used (Domigo, 2001). Ikhide & Aiwoda (1993) argued that reducing money stock of money through increased interest rates would lower gross national product (GNP). Thus the notion that stock of money varies with economic activities applies to the Nigerian economy. As already explained money supply exerts considerable influence on economic activity in both developed and developing economics. Domigo (2001) stated that the low level of supply of monetary aggregates in general and money stock in particular had been responsible for the fundamental failure of many African countries to attain growth and development.
However, in Nigeria, empirical evidence has proved that some linkages exist between the stock of money and economic growth. Since 1970, Nigeria has been controlling her economy through variation in her stock of money. Between 1970 and 2014 real money supply growth rate have been maintaining an irregular trend, it rose from 18.25% in 1970 to 46.1% in 1980. While it decreased to 8.6% in 1996 due to the banking system crises, but it peak up again to 38.0% in 2009 and stood at 19.9% in 2014. Despite a number of challenges faced by Nigeria in 2015 such as drop in oil price (the main stay of the economy), Stock Market Crash, Banking Sector crisis, political challenges, militancy in the Niger Delta and Boko Haram in the North Eastern part of the country, the country have continued to record significant growth over the decades. The economy has consistently posted positive growth through out this period; where real GDP growth rate raised from 22.1% in 1970 to 36.78% in 1980, but it declined to 11.36% and 9.5% in 1990 and 2003 respectively and stood at 6.22% in 2014 (CBN, 2014). The changes in real GDP and money supply in the study period could indicate that there is a causality linkage between economic growth and money supply.THE IMPACT OF MONEY SUPPLY ON ECONOMIC GROWTH IN NIGERIA OVER THE PERIOD 1970 TO 2014