CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

In recent years, the money supply mechanism has received more attention than any other topic in the area of monetary economics. Due to the significance of money supply via monetary policy in achieving macro-economic objectives of nations (developed and developing), monetary economists such as (Ajayi 2022).

Within the scope of monetary targeting, the management of the money supply is an essential instrument for monetary policy. Critical to the effectiveness of monetary policy is the degree to which the monetary authority can exert control over money supply. The implicit assumption is that central banks can control the increase of the money supply, and the money stock is the product of the monetary multiplier and the monetary base. The monetary basis is the amount of currency created by the government. It comprises of money held by the general population and total bank reserves Doguwa (2022).

According to Bhole (2022), monetarists argue that the monetary authorities can exert effective control over the stock of money, whereas non-monetarists maintain that the determination of the stock of money is part of the simultaneous solution for all variables in the financial and real sectors of the economy. In addition, he asserts that, apart from the actions of the central banks, the money supply is decided by the public's actions on the different asset and commodity markets. In opposition to these non-monetarist arguments, monetarists assert that public and banking sector behavior is stable and predictable enough to empower the monetary authorities to manage the money supply. While such divergent viewpoints have been the subject of extensive debate, empirical knowledge on the subject is essential for executing monetary policy in practice.

In evaluating the relationship between money supply and economic development, Ogunmuyiwa & Ekone (2022) concluded that wide money reflects the whole amount of money supply in the economy. Thus, an economy may have an excess money supply (or liquidity) when the amount of broad money exceeds the level of total production. In addition, they emphasize 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 necessary to support productive activities, it will result in undesirable outcomes such as high prices or inflation.

In his research of inflation and its influence on aggregate demand, Oyejide (2022) emphasizes the significance of money supply. The availability of funds renders demand effective, or enables it to be converted into reality. However, if the amount of output in an economy cannot support the level of aggregate demand. The additional demand will drive up the general price level, resulting in inflation. In order to facilitate analysis, it is necessary to establish a proper balance between the two.

1.2 STATEMENT OF THE PROBLEM

Understanding the effectiveness of monetary policy and the transmission mechanism of aggregate money is essential for the success of monetary policy. Effective implementation necessitates that policymakers understand the potential impact of the policy on the macroeconomy and the time lag associated with that impact. The emergence of key policy concerns in the existing policy framework. For instance, do changes in reserve money truly result in changes to broad-based money (M2) and/or inflation? If so, how quickly would these adjustments affect inflation? Consequently, inflation would assist policymakers in determining which instruments are beneficial and which time horizon should be employed to target inflation (Olusegun, 2022).

Conducting monetary policy is a challenging endeavor since its effects on the economy are delayed. The capacity to predict the future is required for goal achievement. Therefore, decision makers should do projections to aid in policy formation. Most central banks incorporate a variety of elements into their forecasts. A portion of this thesis evaluates the information quality of the monetary aggregate utilized by the central bank of Nigeria to target inflation and other critical variables, including interest rate, domestic debt, and exchange rate, which have the potential to serve as helpful inflation indicators. The more open an economy is, the higher the significance of the exchange rate in the policy making process, and the greater the significance of this variable as an optional policy instrument (Olusegun, 2022).

Thus, the sheer nature of economic activity in Nigeria generates a multitude of pressing challenges and difficulties.

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to carry out an examination of factors that influence money supply in Nigeria. Precisely, this study seeks to:

i.          Determine whether monetary policies influence money supply in Nigeria.

ii.        Determine whether the development of the financial sector influences money supply in Nigeria.

iii.      Determine whether inflation influences money supply in Nigeria.

1.4 RESEARCH HYPOTHESES

The following hypotheses will validate this study:

H01: Monetary policies does not influence money supply in Nigeria.

H02: The development of the financial sector does not influence money supply in Nigeria.

H03: Inflation does not influence money supply in Nigeria.

1.5 SIGNIFICANCE OF THE STUDY

This study reveals the general lack of awareness of the factors influencing the variables in the calculation of the money supply and how it might result in a multitude of economic issues. Moreover, the process of money supply in Less Developed Countries (LDCs) is mostly attributable to the level of development of the institutional and organizational structure of the financial sector and, to a lesser extent, the absence of proper policy frameworks by the authorities. These developed institutional and organizational frameworks can facilitate and foster the foundations for effective policy. The presence of proper policy grounds would inform policymakers on how to enhance the system.

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