Money Supply And Inflation Dynamics: A Critical Appraisal Of Milton Friedman’s Hypothesis In Nigeria

ABSTRACT

The study examined the validity of Friedman’s hypothesis and subjected to test the

stability of money demand function in Nigeria over the period of 1970-2006 using

the Nigerian time series data. The study applied the Granger causality test and the

Distributed Lag Model (DLM) to estimate two distinct equations, while the

CUSUM and CUSUM Squares test procedure was used to examine the stability of

money demand function. As a matter of necessity, we subjected our variables to

time series econometric tests using the Augmented Dickey Fuller (ADF) unit root

test for stationary and Engle Granger co-integration procedure.

The empirical result showed that there is a unidirectional causality from money

supply to inflation and no feedback effect. This finding indicates that inflation truly

is a monetary phenomenon and validates the monetarist stance. Hence, there is an

existence of Friedman’s hypothesis in Nigeria.

However, the study also revealed that there is no long run relationship between

money demand and inflation in Nigeria, while the stability test provides evidence that money demand function in Nigeria was stable over the period of estimation.