The present work aimed at examining the determinants of money supply in Nigeria from 1970-2014. The data collected are secondary data from the Annual Report and Statement of Accounts and CBN Statistical Bulletin. The unit root test and Cointegration test, were carried out, and the model was estimated by OLS. The major findings is that Expected rate of inflation  is the major determinant of money supply in Nigeria, while inflationary rates was found to be an insignificant factor determining the level of money supply in Nigeria. Based on the findings of the study, the policy recommendation is that, for Government to control the level of money supply in Nigeria they should target the growth rate of money base and expected rate of inflation, so as to ensure stability in the money supply and also the achievement of monetary policy goals and objectives.





The concept of money supply and its determinants are very important in monetary theory and monetary policy formulation. Money as we know is very important in the economic process and influences general price levels, aggregate national income, output and productivity, the level of employment of labor and capital, exchange rates and balance of payments equilibrium. Thus, the study of money is crucial in appreciating the major influences on aggregate economic performance.Jhingan (2008).

The most relevant obstacle to economic development is the shortage of capital. This is the fact that Jhingan (2001) noted, that in an undeveloped country, the masses are poverty-ridden because there is low rate of savings which is essential for capital formation; and savings depend upon the size of income. The national output is low and so is the national income. The propensity to consume is very high and such small sums as they may be able to save are often hoarded in the form of currency or used in purchasing gold and jewelry etc., and the feeling to hoard money is due to the absence of banking facilities in undeveloped countries. This is the reason why there is scarcity of money supply in Nigeria.

To break this poverty circle, the Federal government creates efficient financial institutions aimed at improving the supply of currency and credit system in the country. More banks and financial institutions are set up to provide large credit facilities at a low rate and to divert voluntary savings into productive channels. However, there is the existence of a strong and powerful Central Bank which acts as the fiscal agent of the government and thus manages the public debt.Jhingan (2001).

The government Over the years have come up with different monetary policy framework same which are highlighted below:

Exchange rate targeting (1970-1979):  The Nigeria economy witnessed significant changes in 1970s that greatly  affected the conduct of monetary policy. The discovery of oil exerted significant impact on exports. Oil contributed about 57.6 percent of total exports in 1970 and grew to 96 percent in 1980. While non-oilexports , mostly agricultural produce, declined rapidly from 42.4 percent in 1970 to 4 percent in 1980.following the increased revenue accruing to government from oil. Nigeria external reserves rose sharply, Thefavorable terms of trade at the time led to considerable growth in public expenditure and thus, intensified inflationary pressures.

Monetary targeting regime ( 1980-1989): This involve the use of direct or market-based instruments. The major focus of monetary policy here is on controlling growth in the monetary aggregates, a policy based on the belief that inflation is essentially a monetary phenomenon. The ability to control money supply relative to the levels required to sustain output growth would, all things being equal, control inflation. With the liberalized conditions under SAP, credit allocation was also substantially affected. The major challenge to monetary policy in the 1980s was the absence of well developed financial market.

The decades of the 1990s witnessed important institutional and policy reforms. The major elements were the promulgation of 1991 BOFID (later BOFIA) and the release of the prudential guild lines. The  CBN implemented in 1992 a number of monetary policy measures to stem the excessive growth in the money stock.. The measures included open market operation (OMO) and discount window operations. The goal of OMO was to influence the volume of credit and by this , affect interest rates and money supply. From 1995-1996, the introduction of the Autonomous foreign exchange market (AFEM) and the pegging of the naira exchange rate. Some of the major challenges to monetary policy during the period included continued reliance on oil exports, slow pace of growth in real output,growing unemployment, rising inflation and weakness in economic management.

In 2002 monetary policy horizon was changed from short term ( 1 year) to medium term ( 2 years) and a new implemented frame work was introduced in December 2006. The CBNnorminal anchor was changed from the minimum rediscount rate (MRR) to monetary policy rate (MPR) with a corridor for standing facilities. The primary instrument of monetary policy during the period remained the OMO, which was complemented by the cash reserve ratio, liquidity ratio e.t.c.

From 2010-2014 Monetary policy was proactive, involving the discretionary management of the CBN’s balance sheet, with a view to ensuring that the operating variables were within programme targets. The primary channel of monetary management was the OMO, supported by reserve requirements and discount window operation.The major challenge will be how to conserve Nigeria’s dwindling external reserves, favourable balance of payments position in the economy.

This research work is based on the above in studying the determinants of money supply in Nigeria.


Money supply is a very sensitive variable, thesize of which determines the pace of any economic activity. Apart from being a powerful instrument of monetary policy, it’s expansion or contraction dictates the growth in investment and output of an economy. It is therefore the usual slogan of the Monetarist school of thought that money matters. They argued that changes in the amount of money in circulation are the sources of other economic changes. In other words, the changes in the size of money supply has a number of implications on the macroeconomics variables especially inflation. According to Nyong (2001), inflation varies ceteris paribus positively a relation to the growth in money supply and negatively with respect to growth in real income or output. In support of this argument, Ogun and Adenikinju (2004) found that the period of oil boom in Nigeria characterized by rapid monetary growth was consistent with the periods when the country experienced double-digit inflation.

The growth in money supply and it’s economic  implications is therefore an issue to be thoroughly investigated. This subject has bothered the minds of Nigerian policy makers for decades. Despite the lags of consensus among different schools of thought on it’s effectiveness as an instrument of monetary policy, the central bank of Nigeria (CBN) relies on it as it’s major barometer for shaping economic  activities. The  design and shift of the monetary measres  taken by the central bank in recent times has been either expansionary or contractionary. Expansionary policy tools has been used on the other hand to decrease money supply in the economy in other to discourage consumption thereby curtailing inflation.

Never the less, the Nigerian money supply process is reviewed to derive more from the consolidated balance sheet of the commercial bank plus the high powered money. A policy decision based on such data might be misleading and sometimes it’s conceived implication on economic activity especially on inflation might equally be misleading. It is instructive therefore to go beyond the usual multiplier approach in determine money supply and properly investigate the factors that empirically determine money supply in Nigeria.

In essences the study will seek to answer the following research questions:

  1. What are the major determinants of money supply in Nigeria.
  2. What is the effect of  inflation, GDP, monetary policy rate, money base on money supply in Nigeria.

The main objective of the study is: Examine the determinants of money supply in Nigeria.

The specific objectives are to:

i..       identify the determinants of money supply in Nigeria, and

  1. determine the relative importance of the factors influencing money supply in Nigeria.


This work will add to the existing literature on how to identify those factors that determine money supply in Nigeria , to know if money supply has being stable over the years and the consequences of changes in the determinant of money supply in Nigeria. The need to adopt this monetarist approach is to test its potency and efficiency in the economic growth activities in the country.

We believe that at the conclusion of this research study, we would have provided the monetary authorities with additional information as regards the composition of money supply function, which in turn would be an effective guide to implementation of better and more effective monetary policy.


Ho:   Money supply is not significantly influenced by  change in GDP, change in money base, inflation, Expected rate of inflation and Monetary policy rate.