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MONEY SUPPLY DETERMINATION IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

The subject matter of the money supply mechanism has gained significant attention in the field of monetary economics in recent years, owing to the crucial role it plays in achieving macro-economic objectives of nations. Monetary policy is a potent tool for regulating the money supply, which can have a significant impact on the overall economy. Leading monetary economists such as Ajayi, Mckinnon, Shaw, Oyejide, Fry Mathieson, Ojo, Ghatak, Odedokun, Levine, Tomori, Asogu, Ogun, Adenikinju, Owoye, and Onafowora have been studying the process of money supply and its determination with great concern.

The successful conduct of monetary policy relies heavily on the degree of controllability that the monetary authority has over the money supply. The central banks can determine the growth of the money supply, and the level of money stock is the product of two components: the monetary multiplier and the monetary base, which is the quantity of government-produced money consisting of currency held by the public and total reserves held by banks.

The monetarists argue that the monetary authorities can exercise effective control over the stock of money, while the non-monetarists hold 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. The empirical evidence on the issue is critical to conducting monetary policy in practice.

Monetary policy has a significant impact on the level of money stock, availability, value, and cost of credit, which, in turn, affects macroeconomic aggregates such as output, employment, and prices. The monetary authorities apply discretionary power to influence the money stock and interest rate to make money either more expensive or cheaper, depending on the prevailing economic conditions and policy stance, to achieve price stability.

In general, most monetary authorities or central banks have been working towards controlling inflation, maintaining a healthy balance of payments position to safeguard the external value of the domestic currency, and promoting economic growth.

Money supply is a crucial concept in the field of economics, particularly in measuring national income and understanding its relation to economic growth and inflation. In Nigeria, different scholars have adopted various theoretical approaches in defining money supply, which is commonly divided into narrow and broad money. Narrow money (M1) includes currency in circulation and demand deposits in banks, while broad money (M2) includes M1 plus savings and time deposits, as well as foreign-denominated deposits.

Ojo (1978) and Uchendu (1997) suggest that the broader definition of money is more appropriate for measuring national income in Nigeria, while Nnanna (2002) and Ojo (2001) define M2 to include quasi-money or time and saving deposits in money banks. Ogunmuyiwa and Ekone (2010) argue that excess money supply or liquidity may result in high prices or inflation, emphasizing the need to regulate money supply to support productive activities.

Oyejide (2004) highlights the importance of maintaining a balance between money supply and aggregate demand, as excessive demand may lead to inflation if the production level cannot sustain it. Therefore, understanding the concept of money supply and its different definitions is

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