Economics Project Topics

A Review on Determination of Money Supply in Nigeria




 Background of the Study

In recent years, the money supply mechanism has received more attention than any other topic in the area of monetary economics. Because of the importance of money supply via monetary policy in accomplishing macroeconomic objectives of nations (developed and developing), monetary economists such as Ajayi (2012), Mckinnon (1973) and Shaw (1973) cited in Adeniyi (2019) have consistently expressed concern. Controlling the money supply is a key policy instrument in implementing monetary policy within the context of monetary targeting. The degree of controllability that the monetary authority has over the money supply is crucial to the effectiveness of monetary policy. The implicit assumption is that central banks can control money supply growth, and that the quantity of money stock is the product of two components: the monetary multiplier and the monetary base. The monetary basis is the amount of money created by the government. It is made up of cash owned by the general population and total reserves held by banks.

According to Bhole (2017), monetary authorities may exert effective control over the supply of money, but non-monetarists believe that the determination of the supply of money is part of the simultaneous solution for all variables in the financial and real sectors of the economy. He goes on to say that, aside from central bank policy, the public’s behavior in various asset and commodities markets determines money stock. In response to such non-monetarist arguments, monetarists claim that the public and banking system’s behavior patterns are stable and predictable enough to allow monetary authorities to regulate the supply of money. While such competing viewpoints have been widely contested, empirical knowledge on the subject is crucial to implementing monetary policy.

According to Akhtar (2017) and the CBN (1995), monetary policy effects the level of money stock and/or interest rate, i.e. the availability, value, and cost of credit in relation to the amount of economic activity. The stance of monetary policy affects macroeconomic aggregates such as production, employment, and prices in a variety of ways, including interest rate or money; credit; wealth or portfolio; and exchange rate channels. However, in their effort to examine the determinants and control of money stock in Nigeria, Akinnifesi and Philllip (2018) argue that, in order to achieve price stability, monetary authorities use discretionary power to influence the money stock and interest rate to make money either more expensive or cheaper depending on the prevailing economic conditions and policy stance. As a result, Wrightsman (2016) concludes that monetary policy is nothing more than a deliberate endeavor to manage the money supply and credit conditions in order to achieve particular broad economic goals. Most monetary authorities or central banks have been tasked with regulating inflation, maintaining a good balance of payments position to protect the local currency’s external value, and supporting economic growth.

In evaluating the relationship between money supply and economic development, Ogunmuyiwa and Ekone (2019) concluded that wide money reflects the whole amount of money supply in the economy. Thus, excess money supply (or liquidity) can occur in the economy when the amount of broad money is greater than the level of total production. They also emphasize that the need to regulate money supply stems from the understanding that there is a stable relationship between the quantity of money supply and economic activity, and that if its supply is not limited to what is required to support productive activities, it will result in undesirable effects such as high prices or inflation.


In another strand, monetary policy is viewed as the central bank’s high-powered obligations, as the acts of the central bank to affect and/or target short-term interest rates or nominal exchange rates. However, Sargent and Wallace (1975)  cited in Ojiofor (2016) argued that under a model with “rational expectations,” if central banks establish nominal interest rate objectives, the price level (and all other nominal variables) might be indeterminate since the economy would lack a “nominal anchor.” McCallum (1987) expanded the idea and demonstrated that a correctly specified interest rate regulation with a “nominal anchor” would prevent such indeterminacy.

The argument over the efficacy and significance of monetary policy has dominated macroeconomics for the last three decades. Several planks have been proposed to address the possibility of’ monetarism’ following the studies of Friedman and Schwartz (1963).. To begin, some monetarists argue that prolonged inflation is a monetary phenomena and that central banks should be held responsible for preserving price stability. The argument here is that central banks should regulate the money supply rather than focusing on short-term nominal interest rates as a tool for achieving long-run inflation targets. (This is because, under a fiat money economy, the money stock served as the nominal anchor for the system).

Other monetarists in the preceding group agreed that inflation management was not the main concern of the monetary authority. Monetary policy, according to Anderson and Carlson (1970), has a large influence on short-run swings in real production but has little effect on long-run output growth. Meltzer (1976, 2003), for example, believes that monetary policy is to blame for past cyclical changes in real production.The Central Bank of Nigeria (CBN) is the sole monetary authority in Nigeria. Its primary mission is to ensure monetary and price stability while also evolving an efficient and trustworthy financial system via the use of suitable monetary policy instruments and systemic surveillance. The Central Bank of Nigeria was established by the 1958 Act, which provided it the following particular powers (which have been retained in the 2007 CBN Act):

Issuance of legal tender currency notes and coins in Nigeria; maintenance of Nigeria’s external reserves; protection of the currency’s international value; promotion and maintenance of monetary stability and a sound and efficient financial system in Nigeria; and acting as banker and financial adviser to the Federal Government. According to Omotor (2017), these aims include two distinct but closely connected roles: a developmental role and a financial monitoring (stability) function. The duties necessitate, among other things, that the CBN prioritizes both price stability and growth. To achieve the aims of price stability and economic growth, the CBN uses its monetary policy instruments in such a way that inflation and growth outcomes are optimum. As a result, the effective implementation of monetary policy is a primary duty of the Central Bank of Nigeria.It is also generally known that in developing nations, there is a propensity to base monetary and financial policy on models based on the money multiplier study (Taylor, 1974). Despite the fact that policies based on such models do not reflect the underlying structure and process of money supply in these nations. These models have a tendency to distort the real structure and process of money supply, perhaps leading to policymakers being misled. This study is thus being conducted with this context in mind.

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 The Statement of the Problems

Understanding the efficacy of monetary policy and the aggregate money transmission mechanism is critical to the effectiveness of monetary policy. An efficient implementation needs policymakers to understand the policy’s potential influence on the macroeconomy as well as the temporal lag. In the existing policy framework, key policy challenges arise. Do changes in reserve money, for example, result in changes in money broadly defined (M2) and/or inflation? If so, how long does it take for these adjustments to have an effect on inflation? As a result, inflation would assist policymakers in determining which instruments are beneficial and which time horizon should be employed to manage inflation. Monetary policy is difficult to implement because it has a delayed effect on the economy. Achieving objectives necessitates the capacity to see into the future. As a result, policymakers should generate forecasts to aid in policy formation. Most central banks consider a variety of elements while making their projection. An part of this study aims to assess the information quality of the monetary aggregate utilized by Nigeria’s central bank to control inflation, as well as other critical variables such as interest rate, domestic debt, and currency rate, which have the potential to be effective indicators of inflation. The more the openness of the economy, the larger the relevance of the exchange rate in the policy process, and the greater the value of this variable as an optional policy instrument.

Thus, the sheer nature of Nigerian economic activity creates a plethora of concerns and problems that demand immediate action. The country’s money supply is increasing at an inflationary rate. There is an unstable general price level that is constantly rising. The country has a high level of unemployment. There is a significant difference between the saving rate and the interest rate, which discourages saves while also discouraging borrowing. The amount of economic activity in the country, along with the global financial crisis, demonstrates that the economy has several issues. As a result, there is a need for efficient monetary policy in terms of estimating the money supply, which is an inescapable duty for economists.


As a result of the problems highlighted above, the researcher desires to achieve the following objectives;

i.          To investigate the sources of money supply in Nigeria.

ii.        To  identify the variables at play in determining money supply in the Nigeria economy.

iii.      To determine the impact of money supply on economic growth in Nigeria.

iv.      Recommending ways in which money supply could be used more effectively in achieving its intended effects of promoting economic growth in Nigeria.

Research Questions

The research questions for this study are stated below:

i.          What are  the sources of money supply in Nigeria?

ii.        What are the variables at play in determining money supply in the Nigeria economy.

iii.      What is  the impact of money supply on economic growth in Nigeria?

iv.      What are the ways in which money supply could be used more effectively in achieving its intended effects of promoting economic growth in Nigeria.


This research work will help us to investigate into the beneficial effects of the control of money supply especially its impacts on economic growth in Nigeria.It will also add to the existing knowledge about the relationship between money supply and inflation in Nigeria.It will equally help students, government, policy makers and corporate bodies in areas relating to monetary policy, the volume of credit to be supplied and economic growth stabilization. The implication of this is not far fetched as research in the field could lead to a proper and more focused policy formulation, which would yield much better results. Empirically the study will contribute to the general body of knowledge and serve as a reference material for scholars and student who wishes to conduct further studies in related field.


We rely on the secondary data for this study of which the sources are the Central bank of Nigeria (CBN) statistical bulletin 2009 and 2010 versions. The research work centers on the impact of money supply on economic growth in Nigeria from 2010 – 2020, It is expected in course of this study that the researcher will examine and appraise the stock of money supply and its impacts with regards to growth in the Nigerian economy.


Like in every human endeavour, the researchers encountered slight constraints while carrying out the study. The significant constraint was the scanty literature on the subject owing that it is a new discourse thus the researcher incurred more financial expenses and much time was required in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size. Thus findings of this study cannot be used for generalization for other economic variable in Nigeria. Additionally, the researcher will simultaneously engage in this study with other academic work will impede maximum devotion to the research. Howbeit, despite the constraint  encountered during the  research,  all factors were downplayed in other to give the best and make the research successful.



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