Money Supply Growth and Inflation in Nigeria: An ARDL Bounds Testing Approach to Cointegration and Causality

This study examines the direction and magnitude of relationship between money supply growth and inflation in Nigeria by employing annual time series data for the period 1990 to 2024. Using a preliminary correlation analysis and scatter plot, the study found that there exists a weak positive correlation coefficient (r = 0.2836) between money supply growth and inflation in Nigeria during the study period, implying that money supply growth may not be the sole driver of inflation in the short-run. The study further examines the causal inference between growth in money supply and inflation in Nigeria. Based on the preliminary study which establishes a weak positive relationship between the two variables (r=0.2836), this paper applies the ARDL Bounds Testing technique by Pesaran et al. (2001) to test for cointegration and causality. This study follows Friedman's monetarist argument which propose that inflation is always and everywhere a monetary phenomenon. Unit root tests show mixed order of integration where inflation is stationary at first difference, and money supply growth is stationary at level. Using bounds test, the study found the existence of long-run relationship, with a F-statistic of 10.324 which is greater than upper bound critical value at 5% significance level. Thus, the presence of long-run relationship between the variables. The long-run coefficient of money supply growth (0.4505, p=0.0752) shows a positive but weak positive impact on inflation, while the error correction term (-0.5377, p < 0.01) shows that approximately 54% of the short-run adjustment to the long-run equilibrium occurs in one period. The Granger causality result shows the unidirectional causality from growth in the money supply to inflation. It was observed that the diagnostic tests show the model is normally distributed, homoscedastic, serially uncorrelated, and well specified.