Money Supply and Price Stability: A Disaggregated Effect from Nigeria

Abstract The objective of this study was to examine the impact of money supply on price stability in Nigeria between the periods of 1990 and 2023. This study collected time series data from Central Bank of Nigeria statistical bulletin (2023). Price stability was modeled as the function of narrow money supply (M1), broad money supply (M2), broad money supply (M3) and quasi money. Auto regressive distributed lag was used to analyze the time series data collected. Findings revealed that both quasi money supply and price stability are moving in the same direction. that holding other independent variables constant, a one percent decrease in money supply (M3) and M3(-2) at current level and period of lag 1 leads to 0.05 and -0.15 percent respectively increase in consumers price index a proxy for price stability and that holding other independent variables constant, a one percent decrease in money supply (M1) at current level and period of lag 1 leads to 0.1 percent decrease in consumer’s price index a proxy for price stability and 50.2% of the changes in consumer price index a proxy for price stability were explained by the changes in disaggregated money supply. From the findings we conclude that money supply affects price stability in Nigeria. The study recommends that there should be further reforms in the financial market that can help reduce the influence of the informal financial sector, be implemented. This would enhance the influence of the central monetary authority in the financial sector, and by implication, enhance the role of monetary policy in macroeconomic management in Nigeria. The need for diversification of the economy so as to channel excessive money supply resulting from deficit financing from different economic yielding vestures and the need for identifying immediate and remote causes of instability in Nigerian economy so as to select the appropriate monetary policy instrument capable of controlling instability in the economy.