MONEY SUPPLY DETERMINATION IN NIGERIA
ABSTRACT
Classicists or Monetarists, Keynesians, and post-Keynesians variables such as income and money multiplier are studied in studies on money supply determinants. The Autoregressive Distributed Lag (ARDL) approach is used to extend the literature on money supply determinants to include the influence of financial liberalization on money supply in Nigeria between 1980 and 2019.
The data for the study came from the 2019 CBN Annual Statistical Bulletin. The study discovered that, in addition to the currency ratio, required reserve ratio, and high-powered money, financial liberalization is an important factor in determining money supply in Nigeria.
As a result, the extent of financial sector liberalization influences decisions on the regulation of the economy’s money supply.
Do You Have New or Fresh Topic? Send Us Your Topic
INTRODUCTION
The money supply is determined by a variety of factors. In the traditional or classical model of money supply determination, for example, there are a variety of options for controlling the level of money supply, including changing the cash reserve requirement. Raising or lowering the cash reserve requirements or the deposits that commercial banks are required to keep with the central bank or monetary authority can affect the amount of money supply.
It should be noted that the larger the deposit of a commercial bank, the greater its ability to generate more money. As a result, the apex bank typically targets deposit money/commercial bank deposit balances by raising the cash reserve requirement to control the growth of money stock, which may cause inflation in the economy.
Fractional reserve banking is also thought to influence money stock: “if only a small portion of a deposit is withdrawn from a bank during a period, the bank is not required to maintain reserves equal to deposits, but could increase its revenues by lending out a portion or the majority of its deposits” (Handa, 2009).
Furthermore, the supply of money can be regulated through changes in the liquidity ratio and money outside the bank (in the hands of the non-bank public) via the bank discount rate. Changes in the discount rate of banks have an impact on the money supply by affecting the volume of discount loans and the monetary base.
A rise (fall) in discount loans increases (decreases) the monetary base and expands (contracts) the economy’s money supply (Gashaw, 2014; Onwumere, Imo & Ugwuanyi, 2012). Similarly, it is believed that the money multiplier, a multiplicity of high-powered money, determines the level of the money supply.
A change in the money multiplier causes a change in the money supply (Gashaw2014; Bakare 2011). According to the Monetarist, the “primary factor” is important in determining the money supply.
The primate factor is made up of the monetary base (high-powered money), which consists of currency and coins held outside the banking system (i.e. notes and coins held by the non-banking public), as well as deposit money banks’ deposits with the central bank, reserve, and currency ratios.
Unlike the Classicists or Monetarists, the Keynesians and post-Keynesians identified variables such as income, interest rate, and economic activity as critical to the determination of money supply. Furthermore, Handa (2009) asserted that, regardless of how it is defined, measured, or assessed, the determination of the stock of money involves some participants.
The public and commercial banks, as well as the central bank, are at the heart of them. The interaction of these three units, as well as their importance in determining money supply, are affected by the state of the economy.
Nonetheless, a critical factor that, in addition to the aforementioned theoretically justified determinants, is also important in determining the quantity of money supply but has yet to receive significant attention is the influence of structural economic transformation or reform, particularly the effect of financial liberalization reform.
According to Shaw (1973) and McKinnon (1973), a financial sector restriction in the form of a high reserve requirement, interest rate, and direct credit ceiling, for example, impedes money flows, financial development, and economic activities.
These factors may influence people’s desire to hold currency rather than deposits. Financial regulation reduces the efficiency of the financial system, resulting in a decrease in economic activity and income and, as a result, a contraction of the money supply. This logically implies that depending on whether the financial liberalization policy is implemented, the supply of money may be high or low.
Unfortunately, there is a lack of empirical evidence on this relationship, with the exception of Muhammad and Islam (2010), which was conducted in Bangladesh using a Least Square method – a static analysis despite the fact that the money supply process is dynamic in nature.
Previous research on the determinants of money supply focused primarily on high-powered money and money multiplier (Lodha & Lodha, 2012; Lone & Yadav, 2016; Odior, 2013), reserve money, Bank rate, and currency ratio (Tiwari, 2016; Shrestha, 2013; Muhammad & Islam, 2010), income or GDP and interest rate (Ifionu & Akinpelumi, 2013; Chigbu & Okorontah
According to Khan and Hye (2013), financial liberalization is a determinant of money demand. The current study adds to the existing literature on the determinants of money supply, particularly in Nigeria, by examining the role of financial liberalization on money supply using an Autoregressive Distributed Lag approach that captures the timing involved in the money supply process.
The overall goal of this study is to assess the determinants of money supply in Nigeria. The following is the rest of the paper: Section 2 contains the literature review, Section 3 contains the data and methodology, Section 4 contains the results and discussion, and Section 5 contains the conclusion and policy recommendations.
MONEY SUPPLY DETERMINATION IN NIGERIA
INSTRUCTIONS AFTER PAYMENT
- 1.Your Full name
- 2. Your Active Email Address
- 3. Your Phone Number
- 4. Amount Paid
- 5. Project Topic
- 6. Location you made payment from