The Dynamics of Money Supply, Exchange Rate and Inflation in Nigeria (1986-2004)
The study examined the exchange rate policies and monetary policies in Nigeria over the period of study 1986 – 2004, analysed the trend and pattern of exchange rate, money supply and inflation, investigated the long run relationship between monetary growth, exchange rate and inflation in Nigeria, and also determined the relative contribution of money supply and exchange rate on inflation. This was with a view to determining the relationship between money supply, exchange rate and inflation in Nigeria. The study utilized secondary data. Quarterly data on money supply, exchange rate and inflation in Nigeria covering the period 1986 – 2004 were collected from Statistical Bulletin published by the Central Bank of Nigeria (CBN), and International Financial Statistics (IFS) published by International Monetary Fund. The stationary and cointegration properties of the variables were also tested using the ADF. The Vector Error Correction Mechanism (VECM) analytical technique was used to analyse the data. The appraisal of exchange rate policies and monetary policies in Nigeria with particular reference to inflation showed that in the long run, money supply had significant negative effects on inflation (t = 1.16; p<0.05). Exchange rate also had significant negative effect on inflation (t = 0.55; p<0.05), real output growth had significant positive impact on inflationary pressure in the long run (t = 1.99; p<0.05), while foreign price was positively related to inflation but not significant in the long run (t = 0.35; p>0.05). The empirical deductions from the study also showed that in the short run, there was the presence of significant feedback from the long run to short run disequilibrium (t=-3.6363, p<0.05). The estimates from the variance decomposition and impulse response showed that money supply (F=4.48; p<0.05) exchange rate (F=2.75; p<0.10) and foreign price (F=2.38; p<0.10) had stronger influences on domestic prices than real output. The study concluded that inflationary pressure was not basically money supply-induced but could be caused by the level of variations in the exchange rate.