Money Supply and Inflation Rate Dynamics in Nigeria

Abstract

This study examined money supply and inflation rate dynamics in Nigeria over the period 2010M1 to 2025M12, with a view to identifying the monetary transmission mechanisms through which variations in monetary and fiscal policy instruments influence domestic price stability. The study employed the autoregressive distributed lag (ARDL) to establish both the long-run and short-run relationships between Consumer Price Index and Narrow Money (M1), Inter-Bank Rates (INB), Treasury Certificates (TC), Nigerian Treasury Bills (NTBs), Ways and Means Advances (WAMA) and Bureau de Change Average Exchange Rate (AEXR). The findings from the ARDL long run and bound test revealed that M1 and AEXR exert significant positive long-run effects on inflation during the study period. The second-step ECM results further confirmed a valid error correction mechanism, indicating that about 3.8% of short-run disequilibrium is corrected within one period, thereby establishing the existence of a stable long-run relationship between inflation and its determinants. These results underscore the complex interaction of monetary aggregates and exchange rate dynamics in driving Nigeria’s inflationary process. The study concluded that inflation in Nigeria is structurally influenced by both demand-pull and cost-push factors, reflecting excessive monetary expansion and exchange rate volatility. Recommendations drawn from the findings suggest the need for a coordinated monetary-fiscal policy mix, effective management of money supply, and credible exchange rate stabilization measures. Furthermore, reforms aimed at deepening the financial market and enhancing the effectiveness of open market operations are necessary to strengthen the inflation-targeting framework in Nigeria.