Money Supply, Inflation and Capital Accumulation in Nigeria

Abstract

This study examines the relationship between money supply, inflation and capital accumulation in Nigeria between 1970 and 2010. The study investigated the long run relationship of the variables using Johasen cointegration test. As a follow up to this, Error Correction Model was conducted on the variables to capture their short run disequilibrium behavior. Cointegration test reveals that variables employed in the study share long run relationship. The result of the Error Correction Model indicates that money supply (both broad and narrow) has a positive relationship to capital accumulation in Nigeria. It implies that government should direct finances on investment in other to stimulate economic growth in the country. Also the intention of government on inflation targeting should not neglect the contribution of money growth to capital accumulation.

Keywords: Money growth, Inflation, Capital accumulation, Cointegration test, Error Correction Model and Stability test.