Inflation and Money Supply in Nigeria

BAMIDELE, T.B AND JOSEPH, A.I

Department of Economics

Ajayi Crowther University, Oyo, Oyo State, Nigeria.

E- mail: timothydele@yahoo.co.uk, toy4kuns@yahoo.com

ABSTRACT The objective of this paper is to examine the relationship between inflation and money supply. Based on the Quantity Theory of Money (QTM) model by Irving Fisher, we have used the OLS estimation techniques and the Chow test to empirically investigate the proposition and to test for the structural significance. In testing for the relationship between inflation and money supply we used two models, M1 (Narrow Money Supply) and M2 (Broad Money Supply) model. The innovation of this study is that we divided the study period into pre Structural Adjustment Programme (SAP) and since SAP. Our basic result indicates that there is a strong correlation between inflation and money supply and that inflation and money supply have a significant impact on the Nigerian economy. However, the chow test result rejected the hypothesis that there is a significant difference between the two periods. In general there is a stronger correlation between inflation and broad money supply (in the second model); therefore, we concluded that it is a better estimate of