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Humanities and Social Sciences Letters

September 2019, Volume 7, 3, pp 156-166

Money Supply and Inflation Rate in Nigeria: The Missing Link

Udo Emmanuel Smauel


Ben Etim Udoh


Abner Ishaku Prince


Okoh, Johnson Ifeanyi


Okolo Marvis Ndu

Udo Emmanuel Smauel 1 ,

Ben Etim Udoh 1 Abner Ishaku Prince 1 Okoh, Johnson Ifeanyi 4
Okolo Marvis Ndu 1 
  1. University of Nigeria Enugu Campus, Nigeria 1

  2. National Open University of Nigeria, Nigeria 4

Pages: 156-166

DOI: 10.18488/journal.73.2019.73.156.166

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Article History:

Received: 26 March, 2019
Revised: 02 May, 2019
Accepted: 24 June, 2019
Published: 22 August, 2019


Conventionally and theoretically increase in money supply according to the quantity theory of money triggers a high inflation rate in developed and emerging economies. The reality in Nigeria contravenes the quantity theory of money. This study investigates the missing link in Nigeria from January 2010 to December 2018 by applying the Johansen co-integration, Granger causality tests and Vector Error Correction Model (VECM) on the monthly data. The findings indicated that money supply does not cause inflation. Inflation is caused by non-monetary factors of political instability, corruption, poor basic infrastructure among others. Money supply and inflation co-integrate in the long-term. The causality test proposed a uni-directional flow from inflation to the money supply. Bi-directional causality was not observed in this study. The VECM result indicated that disequilibrium caused in the previous year can converge back to equilibrium in the current year. The general findings of the study disagreed with the quantity theory of money. The study recommends that non-monetary factors of political instability, corruption, poor basic infrastructure among others were responsible for the missing link. These factors should be checked and put in perspective to achieve low inflation at a single digit in Nigeria.
Contribution/ Originality
This study contributes to the extant literature by using monthly M3 and M2 money supply data, and the implicit price deflator to GDP to measure inflation, the GDP and monetary policy rate. This study investigates the missing link between money supply and inflation rate in Nigeria by using the data from January 2010 to December 2018. The above serves as a hug contribution which most studies used M2 money supply and annualized time-series data.


Money supply, Inflation, Granger causality, Cointegration, VECM, Monetary policy rate



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This study received no specific financial support.

Competing Interests:

The authors declare that they have no competing interests.


All authors contributed equally to the conception and design of the study.

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