Money Supply, Price Level and Output: Evidence from Short and Long run Vectors in an Error Correction Model

Résumé

The paper examines the relationship between money supply, price level and national output in Nigeria using quarterly time series data spanning the period of 1986Q1 to 2016Q2. The data was mainly sourced from the IMF International financial statistics and CBN Statistical Bulletin. Using Johansen`s co-integrated test, the study suggests there is evidence of long run relationship between money supply, price level and national output in Nigeria. In the long run, the paper reveals existence evidence of positive relationship between long run vectors of money supply and national output, and as well, price level and national output. The result also suggests in the short run the first lag of LGDP is positive and statistically significant at 1% level. The result also found an inverse relationship between second lag of money supply and national output in the short run, although, the vector of the relationship is statistically insignificant. This means while national output of the immediate past year has exerted positive and statistically significant influence on current national output (LGDP), the influence of money supply of the past two year has a negative and insignificant effect on national output. Since the policy implication of the results of this paper is very clear, the paper suggests money supply should be treated with caution in the short-run. In the long run however, the paper is of the view that when applying monetary policies to foster growth, there is a need for monetary authorities to always estimate the demand for money to avoid high inflation for the economy. This suggests there is a clear need for monetary authorities to implement credible policies that would in the long run greatly tamed the effect of inflationary pressure on the economy.