DETERMINATION OF MONEY SUPPLY IN NIGERIA.
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DETERMINATION OF MONEY SUPPLY IN NIGERIA.
Chapter one
1.0. Introduction.
In recent years, money supply mechanisms have received more attention than any other topic in monetary economics. Monetary economists such as Ajayi (1972), Mckinnon (1973), Shaw (1973), Oyejide (1974), Fry Mathieson (1980), Ojo (1993), Ghatak (1995), Odedokun (1996), Levine (1997), Tomori (1984), Asogu (1998), Ogun and Adenikinju (2004), and Owoye and Onafowora (2007) have consistently expressed concern about the process of money supply.
Controlling the money supply is a key policy tool for implementing monetary policy within the monetary targeting framework. The extent to which the monetary authority has control over the money supply is crucial to the success of monetary policy.
The implicit assumption is that central banks can control the expansion of the money supply, and that the amount of money stock is the product of two factors: the monetary multiplier and the monetary base.
The monetary basis refers to the amount of money produced by the government. It consists of currency held by the general people as well as total bank reserves. Doguwa (1994).
According to Bhole (1987), monetarists argue that monetary authorities can exercise effective control over the stock of money, whereas non-monetarists believe that determining the stock 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, in addition to central bank policy, the public’s activity in various asset and commodity markets determines money supply. In contrast to such non-monetarist views, monetarists contend that the public and financial system’s behavioural patterns are stable and predictable enough to allow monetary authorities to manage the money supply.
While such competing viewpoints have been extensively argued, empirical knowledge on the subject is crucial for implementing monetary policy in practice.
According to Akhtar (1997) and the Central Bank of Nigeria (1995), monetary policy effects the level of money stock and/or interest rates, i.e. the availability, value, and cost of credit in relation to economic activity.
The stance of monetary policy affects macroeconomic aggregates such as output, 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 (1978) argue that monetary authorities use discretionary power to influence the money stock and interest rates, making money either more expensive or cheaper depending on the prevailing economic conditions and policy stance, in order to achieve price stabilisation.
This is why Wrightsman (1976) concludes that monetary policy is just a conscious endeavour to control the money supply and credit conditions in order to achieve broad economic goals.
In general, most monetary authorities or central banks have been tasked with limiting inflation, maintaining a strong balance of payments position to protect the external value of the home currency, and supporting economic growth.
While attempting to identify the right definition of money in Nigeria, Ojo (1978) used Chetty’s theoretical method with 1961-79 data and discovered that a broader definition of money is more suited for measuring national income in the Nigerian economy.
Uchendu (1997), in an attempt to create a relationship between the monetary base and the money supply, defines money supply from the Central Bank balance sheet accounting framework as (M1), which is the sum of currency in circulation C and deposits D. Thus, M1 = C+D, and from the broader definition, M2 = C+D+TD, where TD is time deposit.
Furthermore, Nnanna (2002) and Ojo (2001) define money supply (M2) as an expansion of the narrow measure of money (M1) to include time and saving deposits at money banks (DMBs), also known as Quasi-money (QM), which are not directly usable as a means of payment but can be converted into generally acceptable means of payment. Therefore, M2 = M1 + QM.
In general, the money supply can be divided into two categories: narrow money and broad money. Narrow money (M1) refers to currency in circulation with non-bank public and demand deposits or current accounts in banks. Broad money (M2) refers to narrow plus savings and time deposits, as well as foreign denominated deposits (CBN, 2010).
Ogunmuyiwa and Ekone (2010), in their analysis of the relationship between money supply and economic growth, concluded that wide money measures the whole volume of money supply in the economy.
Thus, excess money supply (or liquidity) can occur in the economy when the amount of broad money exceeds the level of overall output.
They emphasise that the need to regulate money supply is based on the knowledge 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.
Oyejide (2004) emphasises the importance of money supply in the study of inflation and its impact on aggregate demand. The availability of money makes demand effective, allowing it to be converted into reality.
However, if an economy’s production level is insufficient to meet aggregate demand. Excess demand will drive up the general price level, resulting in inflation. As a result, it is necessary to strike a good balance between these factors in order to facilitate analysis.
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