Money Supply and Inflation Nexus in Nigeria, 1981-2018: Engle-Granger Approach

Abstract

Economic instability in Nigeria more often than not causes high inflationary pressure. Monetary and fiscal inadequacies have been blamed as the major causes of price instability in the economy. The study examines the monetary aspect of high inflation in Nigeria; in other words, the relation between money supply and inflation in Nigeria using annual series for the period, 1981 to 2018. The variables are checked for unit roots and found to be stationary at first difference. Sequel to this finding, we adopt Engle and Granger approach for the analysis of the datasets, and the results indicate a long-run relationship between moneysupply and inflation in Nigeria. In the short-run, money supply is found to exert a positive and significant impact on inflation in Nigeria. Following the establishment of long-run relation between the two variables, the ECM test conducted shows that 41 per cent of disequilibrium in the short-run is corrected annually. Granger causality outcome suggests a uni-directional causality from money supply to inflation.