Impact of Money Supply on Economic Growth in Nigeria: Evidence from Vector Autoregressive Model

Abstract

This study examines the impact of money supply on Economic Growth in Nigeria using time series data spanning 1980-2019. Data on currency in circulation (CIC), narrow money supply (M1), broad money supply (M2) and real gross domestic product (RGDP) were collected from the online database of the Central Bank of Nigeria (CBN) and were analyzed using the unrestricted Vector Autoregressive (VAR) model. Impulse response function (IRF) and Cholesky variance decomposition (VDC) were also obtained from the VAR estimates to measure how shock are transmitted across the variables of the study. Findings from the study show that CIC has a positive and significant impact on RGDP with estimated coefficient of about 6.98, but could not predict economic growth well in the Cholesky variance decomposition. While M1 is a weak predictor of RGDP, it has a negative and insignificant impact of about 19.7%. on RGDP. However, although, the significant impact of M2 on RGDP is negative, M2 is a strong predictor of real GDP with about 47.1% forecast error variance into the future period. Based on the findings, the study recommended that the Central Bank of Nigeria (CBN) should encourage economic growth through appropriate control of currency in circulation outside banking system. This may be achieved by reducing charges on cash withdrawal and on electronic transaction in order to increase the volume of CIC in the economy.

Keywords: Money Supply, Economic Growth, VAR