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This study examined the relationship between Money Supply, Inflation andOutput level in Nigeria with view to ascertaining the existence or otherwise of the Tobin effect. To achieve this, the study employed the ARDL bound testing approach to cointegration on annual series of Money supply, CPI and real GDP growth rate from 1970-2016.After controlling for the observed structural breaks in the series using the dummy variable approach, the short run model shows that Money supplyexerts a positive impact on the output level by of 0.21% while inflation retards output by 0.11%. However, in the long run, both money supply and Inflation were found to have no significant impacton output level. This findings suggest the absence of Tobin effect in Nigeria. The study therefore recommends that:the monetary authority must fasten its braces against inflation as well as its money supply generating mechanisms. Also, in order to consolidate the short run gains in output achieved by the money supply through the long run, effort should be geared towards boosting the productive base in order to meet up with the increase in demand which will consequently tame inflation.



1.1 Background to the Study

The relationship between money supply, output and prices is a pertinent issue in

economics. It is a relationship that has prompted an unending probe by central bankers and

academicians from the time of the Classical quantity theorists in the 20th century to the

monetarists in the 1950-1960s to date. The classical economists view money supply as the only

factor responsible for inflation through the demand channel. They give more importance to

monetary policy in stabilizing the economy. The Keynesians on the other hand opine that when

thereis under unemployment in the economy an increase inthe money supply leads to an increase

in aggregate demand, output and employment only in the short-run (Hussain, Faarooq&Akram,


While the Classicals‟ view the aggregate supply (AS) curve as vertical as any increase in

money supply leads to increase in prices only, the Keynesians contend that, is an inverted L-

shape. As a result, in the long–run there is no effect of money and therefore, the Keynesians

recommend the use of fiscal policy in stabilizing the economy (Hussain, 2010).

According to Waliullah&Fazli-Rabbi (2011), all plausible economic explanations about

the relationship between money supply, output and prices have become a debate between two

major schools of thought, that is the Keynesian and monetarist schools of thought. According to

the Keynesians, in the Hicks-Hansen IS-LM model, money affects output positively through

changes in the rate of interest; i.e. changes in money stock are induced by changes in income and

not vice versa. In other words, Keynes believes that so long as there is unemployment, output

will change with a change in the quantity of money without affecting prices; and contrariwise


when there is full employment (Gatawa, Abdulgafar&Olarinde, 2017). On the other hand,

monetarists contend that money has a direct and proportional effect on output. However, in the

long-run its effect on income is neutralized, since prices change proportionally to change in

money leaving the real value of income unchanged.

It is widely acknowledged that inflation inhibits growth (see: Waliullah&Fazli-Rabbi

2011; Babatunde&Shuaibu 2011). Conversely, Tobin (1965) posits that inflation spurs growth

via capital accumulation and interestingly, Mishra, Mishra & Mishra (2010) provide empirical

support for Tobin‟s supposition in India. This raises the question of whether inflation promotes

or retards output growth.

In Nigeria, output growth and inflation have exhibited significant fluctuations over the

years and have witnessed substantial changes since the country‟s attainment of political

independence in 1960. Boosting the level of output is of utmost importance given its impact on

the standard of living. The Nigerian economy is characterized by structural challenges that limit

its ability to sustain growth as the economy is highly dependent on a single commodity for

economic activities, fiscal revenues and foreign exchange – oil. For example, the high growth

recorded during 2011-2015, which averaged 4.8% per annum is mainly driven by higher oil

prices (Ministry of Budget & National Planning, 2017). Interestingly, this oil money is also

capable of increasing the price level.

Inflation has been an issue ofconcern to policymakers in Nigeria in recent years, given

the need to stimulate domestic demandand to meet government‟s huge fiscal obligations in a

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