The Impact of Money Supply on the Economic Growth Nigeria

INTRODUCTION

BACKGROUND OF THE STUDY

In the critical observation of the recent Nigerian economic position, there has been a great divergence between the rate at which money is supplied and the exact impact it has on the general price level, which results in inflation and deflation on one hand, and the output growth (productivity) on the other hand. Although, it had occurred to our mind that Nigerian monetary policy continues to aim at achieving single digit inflation, a stable Naira, increase in domestic production and a stock of foreign exchange reserves equivalent of at least six months of current imports, the Central Bank of Nigeria (CBN) relies on Open Market Operation (OMO), Cash Reserve Operations, Minimum Liquidity Ratio, Discount Window Operations (OWO) etc, to control growth in monetary aggregates, changes in minimum re-discount rate (MRR) to determine interest rates, and a Dutch Unction system to determine the value of the Naira (See Anyanwu, 2003).

However, the CBN publications have proved that since 2003, the monetary authority is conducting an Open Market Operation on a daily basis instead of bi-weekly in order to exert greater control over the country’s (Nigeria) financial market conditions. Hitherto, monetary aggregates have tended to overshoot the CBN’s targets due largely to the expansionary fiscal policies. Then, as a result of this fiscal surplus, in the first nine months of 2004, annualized growth in broad money supply (M2) was only 13.2% compared with the expansion of 24% made in 2003 (See CBN Annual Report and Statement of Accounts, 2003).

In the year 2004, the Federal Government strengthened the budget process towards an improved expenditure co-ordination through the introduction of Cash Management Committee (CMC), whose function was to monitor and reconcile monthly expenditure releases, and determined projects. But in that same 2004, the annual inflation rate was moderated to an estimated 15.0% in October 2004. The persistence pressure on prices in 2004 was attributable to the impact of the partial deregulation of the 2003 monetary expansion. Since the face of the interest rates remain largely stable in 2004, it was expected that inflation will follow a downward trend in 2005, 2006 and 2007, as the continued improvement in Agricultural production reduced inflation in food prices, (Source, CBN Annual Report and Statement of Account, 2003).

Furthermore, from the recent CBN Annual Statement of Reports under the real sector, it was indicated that the growth in domestic Product (GDP) measured in 2007 in 1990 basic prices amounted to N634.1 billion thus, representing a growth rate of 6.2% compared with 6.0% in 2006. However, output growth fell below the projected average of 7.0%, estimated for the five year period 2003-2007. Growth in 2007 was broad based but driven mainly by the non-oil sector. Agriculture grew by 7.4% led by crop production and fishing. Wholesale and retail trade grew by 15.3% and service(s) subsector by 9.8%.

Mining and quarrying as well as manufacturing however, grew even as electricity consumption declined. The moderation in inflationary pressure that began in 2005 was sustained in 2007, attributable largely to good Agricultural harvest and a non-accommodating monetary policy. Thus, the single digit inflation target had been sustained two years in a row. Further expansion in national output was however, constrained by poor infrastructures, a mild drought and flooding experienced in some food producing areas.

Available data from the National Bureau of Statistics (NBS), indicated that the national unemployment rate in the 1st quarter of 2007 was 14.6%, compared with 13.7% in 2006. The Urban and Rural rates were 14.4% and 15.0% respectively compared with 10.2% and 14.8% in 2006.

Meanwhile, the reason behind the monetary trends above, is to understand the lapses in monetary management, and having observed the alternations between the rate of inflation and deflation, it seems as if we had not done enough work, in regulating the supply of money. Otherwise, we had found the repeated cases in which people seem to have so little money that they were unable or certainly reluctant to buy everything that could be produced. As a result, price fell, profits vanished, production shrank and unemployment spread.

We had also found frequent examples of the opposite situation, where the inflation spiral in which the quality of money outruns the supply of goods and people would lose through being outbid in the market place.

The whole mystery is centered on the fact that commercial bank credit is a major factor contributing to the increased quantity of money in circulation in the Nigerian economy. But since the total stock of money determines the economy level to an optional, the monetary policy target is to bring the economy back to a desired optimum, but the extent to which it achieves that, is however another issue. The popular notion is that most monetary policies had failed in Nigeria due to wrong implementation of the policies or due to the uncooperative attitude of the banks before the consolidation of banks in Nigerian economy in January, 2001.

Therefore, in discussing the concept of money supply and its impacts, two other issues often come to our mind namely, the state of inflationary pressure and the unemployment rate. According to the monetarist “inflation is everywhere a monetary phenomenon.” Their view was that increase in money supply in an economy, causes an increase in the general price level of commodities (inflation) – (Uzoaga, 1981).

Related to the problem of inflation is the issue of unemployment. Generally, the primary goal of any economy is to achieve a high level of employment so as to be able to produce as many goods and services as possible while maintaining an acceptable level of price stability. Therefore, the level of output or productivity (real GDP) and employment on one hand, and the level of prices on the other hand, has a common determinant which is the level of total spending.

Thus, we have so far been observing that the control of money supply could control all the variables that are obstructed from its targets, such that gross domestic product, employment, aggregate demand etc, could be controlled in Nigeria simply by controlling the money supply. This research work therefore, would review the technicalities involved in the control of money supply in Nigeria economy.

STATEMENT OF PROBLEM

A study of this nature is always necessitated by the existence of certain problems. The major problem that triggered off this work is the reoccurrence of general price instability and persistent inflationary pressures in the economy, in spite of the plethora of monetary policy tools adopted and applied over the years.

There is also this problem of general feeling that a continuous annual rate of money increase will adversely increase the rate of price level which will directly lead to inflation, thus, requiring a policy response. Recently, this inflationary pressures had succeeded in erecting a devaluation in Nigeria’s currency value as a result of expansionary measures of money supply.

From the above problems, this research work is meant to investigate on these questions viz; a.Why has the expansionary and contractionary measures of money supply adopted by the CBN failed to correct the problems of high rate of inflation and real Gross Domestic Growth (GDP) in Nigerian economy? b.Are the monetary policy measures adequate in controlling the rate of economic depression in Nigerian economy? c.If measures been adopted were ineffective and inefficient, what should be the rightful measures to be taken in order to promote real GDP Growth in Nigerian Economy?

Real Gross Domestic Product values were equally increasing given the increase in monetary expansion by the government.
There were huge deficits accumulated as a result of the government borrowing excessively from external sources. Also, the invested assets were not productive hence, the negative fluctuations in the fiscal deficit values.

OBJECTIVES OF STUDY

As a result of the problems stated above, the researcher desires to achieve the following objectives; (1) To determine the impact of money supply on economic growth in Nigeria. 2.To trace the transmission of structural shocks among money supply and its determinants. 3. Recommending ways in which money supply could be used more effectively in achieving economic growth in Nigeria.

RESEARCH HYPOTHESIS

Based on the available data, this work is interested in testing out the hypothesis below; H0:The impact of money supply on economic growth in Nigeria over the years is not significant. H1:The impact of money supply on economic growth in Nigeria over the years is significant.

SIGNIFICANCE OF THE STUDY

This research work will help us to investigate into the beneficial efforts on the control of money supply and its impacts in relation with the level of economic growth in Nigeria. It will also add to the existing knowledge about the relationship between monetary policy and inflation in Nigeria.

It will equally help students, government, policy makers and corporate bodies in areas relating to monetary policy, the volume of credit to be supplied and economic growth stabilization. The implications of this is not far- fetched as research done in this field could lead to a proper and more focused policy formulation, which would yield much better results.

SOURCES OF DATA AND ITS SCOPE

We rely on the secondary data for this study of which the sources are the CBN publications and Annual Report and Statement of Account, Federal Office of Statistics, publications, newspapers and students’ research works.

The research work centers in the impact of money supply on economic growth in Nigeria from 1970 – 2007. It is expected in course of this study that the researcher will examine and appraise the stock of money supply and its impacts with regards to attaining real Gross Domestic Growth in Nigeria, and the possible means measures of reforming and controlling these impacts.

REVIEW OF LITERATURE

THEORETICAL LITERATURE

When it comes to considering the relationship between the state of economic growth and the rate at which money is supplied, it is clear that a great amount of empirical and theoretical work remain to be done. With monetary policies and association of monetary and fiscal policies in determining the exact influence of money supply, there is a sizeable literature on which this and further researchers can rely, but little of this appears to have penetrated the mainstream of what literature is required in monetary economics.

Although, in case of difficulties in finding much of existing literature on money supply (as to compare lots on money demand), policy makers have agreed that the reason could be the inaccessibility of various channels through which money is supplied. These channels are shared by the federal Government Fiscal policies via tax cuts and budget spending and the Central Bank of Nigeria’s monetary options. Yet, having observed that each of the above-mentioned policies exert its influence on the quantity of money stock in the economy, the issue remains the robustness of the surrounding theories. The support of the government had led to the general belief by the policy makers, that Central Banks does not take full control of the quantity of money supplied to an economy. However, our literature review is centered on the components and the impacts of monetary policy options in Nigerian economy.

The first known attempt to define the concept of money supply in Nigerian economy was done by Roman and Newlyn. Both monetarists agreed that the definition of money supply should based on the stage of development of the financial system and the concept of money adopted which serves as a working rule for measurement purposes and guided by the institutional framework of the economy.

Meanwhile, the supply of money implies the amount of cash and currencies available in an economy in sufficiently liquid and spendable forms at any point in time. It is on this notion that money forms a very important instrument which can be manipulated as a money stock variable in order to control money supply in an economy. But, the formation of money stock in any modern economy have been found to be more than just currency as the case maybe, but the extent to which the financial system is developed determines the other instruments. This is why the Federal Government Monetary Management (FGMM) basically, is to influence macro-economic variables and the use of appropriate instruments which vary between developing and developed countries.

Money supply can also be defined as the sum of all the money holdings of all the members of the society. This could be either M1 or M2 in Nigeria, M1, M2 and M3 in United Kingdom (UK) or M1, M2, M3 and M4 in United States of America (USA).

The M1 is a narrow measure of money supply. It focuses on the role of money as a medium of exchange and defines money as “currencies in circulation (notes and coins) outside the banks plus demand deposits held in banks = C+DD. The Central Bank of Nigeria defines M1 as currencies outside banks plus privately held demand deposits. M2 is a broad measure of money supply. It include savings and time deposits held in commercial banks. It been defined by the CBN as M1 plus quasi-money (i.e. time and savings deposit) = C + DD for M1+ SD + TD for M2.

The argument for including time and saving deposits of commercial banks is that they can be converted into cash at short notice and used to carryout financial transactions. M3 comprises of M1 and M2 plus deposits held in other financial institutions including finance houses merchant banks and similar institutions (i.e. C + DD for M1 + SD + TD for M2 + Dx for M3). The arguments supporting M3 is the same for M2 (i.e. it can be converted to cash within a short notice). M4 comprises of M1, M2, M3 plus investment in government bonds and securities such as Treasury bills & certificates, call money etc. the arguments for including the government security is that they are easily cashable which makes them influence the spending habit of its holders in the same way a bank deposit does.

Although money has been discussed as M1, M2, M3 and M4 above , they are all not recognized in Nigeria as the CBN only recognized M1 and M2 as the total Nigeria’s money supply. This is because the country’s financial markets are still not relatively developed. Another type of money supply is the base money identified as M0. It comprises of all currencies in circulation and all reserves of banks including the Central Bank. It is a high powered money used in creating other types of money. A monetary Economist argued that a general reduction in interest rate would increase the availability of consumer goods as well as investment credit. Hence, the reduction of government expenditures would offset the effects of this increase.

In similar manner, another monetary Economist had his own view concerning the monetary policy effects. He said that since the Nigerian money market is still underdeveloped, the instruments of monetary policy could not possibly be a better measure for combating inflation in Nigeria. Therefore, his opinion has formed a conclusive aspect of little but well researched literature gathered for the purpose of completing the knowledge of money supply. Though, there exist other related theories, our interest is to form a coherent understanding on what previous writers had said concerning the rate at which money is supplied, its components and the prevailing impacts to an economy.

EMPIRICAL LITERATURE

The empirical works of this study were conducted in determining the exact relationship between the rate at which money is supplied and its influence on the general price level as well as economic growth. Such relationships and proper control of monetary phenomenon have created a lot of controversy among the monetary Economists.

After much divergent arguments done on the control of monetary phenomenon, we were able to learn that through more plausible (reasonable) and theoretically supported routes of most monetarists, that an increase in the money stock will have little or no effect on real output and employment in the long run, but will merely raise the price level thereby resulting in potential inflation (see Nwobodo, 1973).

Although the monetary Economists in the later years have attempted to identify the determinants of money supply while some scholars believed that money supply is exogenously determined by the Central Bank of the economy, yet others outside these scholars had argued that the supply of money is an endogenous variable (see Culbertson, 1972).

Culbertson established the constituents of money supply including M1 and M2 and their constituents. Their definitions he ascertained, is the standard definition in many developing countries with underdeveloped financial infrastructures.

Anyanwu (1998, supported the fact that the development of the financial market determines the definition of money supply to an economy.
In addition, the impact of money supply on inflationary spiral has never been left out. According to Griffiths (1976), inflation is the result of excess demand and should be brought under control by removing the excessive demand through a reduction in the growth of money supply which automatically reduces the growth of prices and wages as well, through monetary policy contractionary measures.

Odozi (2001) argued that monetary authorities should avoid discretionary
monetary policy, but should adopt monetary growth principles that will alleviate the public skepticism about the possibilities of inflationary monetary policy in future.

Hogger (1964), believes in the theory of the total absence of money and monetary inflation in combating inflation. To him, once there is a tendency towards capacity shortage in an economy, it tends to produce inflationary effects which cannot be ignored, if the problem of inflation is persistent.

What are needed are measures that will maintain investment deposits and reduction in the growth of income. The most direct way to accomplish these desired result would be to reduce interest rate and government expenditure.

Fisher (1932), argued Ceteris Paribus that as the money supply changes, the price level and output changes likewise the value of money (purchasing power). To him, the effects of money supply on price level are shown by the following equation: P=M + M1 V1

T where M + M1 = Provide the volume of economic activities T=The total amount of goods and services traded with money. V=Velocity
P=The price level Keynesian Economics showed that the monetary policy could be used to control aggregate demand and output in the short-run, but does not provide the effects of changes in money stock on output quantitatively.

Milton Friedman argued that the supply of money is independent of the demand for money. He observed that bearing the development of hyperinflation, only wealth is the variable likely to cause significant changes in velocity (see Jhingan, 2001).

Generally, in assessing the use of monetary policy, through empirical research, in controlling money supply in Nigeria, Ojo and Adedumi considered monetary policy formation as the most important active policy of Central Bank because of its impact on economic development and welfare of all. They concluded that the greatest problem of attaining the policy objectives in Nigeria is the government’s over increasing expenditure from year to year, which is contradictory to the objective of dampening inflationary pressure in the economy. Hence, it is a priority expected that money supply in the Nigerian economy would be positively correlated with GDP and the general price level.

In conclusion, we have succeeded in reviewing some related literature of some persons of the subject matter in the Nigerian economy and this will go a long way to educate on the achievement of monetary policies, the appropriate measures of money supply and control of its negative impacts towards achieving the macro-economic goal of Nigerian sustainable growth.

MEANING OF MONETARY POLICY

Monetary policy refers to the combination of measures designed to regulate the volume, supply and cost of money in an economy in conjunction with the expected level of economic activities. An excessive supply of money would result in an excess demand for goods and services, which would lead to rising prices or a deterioration of the balance of payment position. On the other hand, inadequate supply of money could induce deflation which leads to stagnation in the economy thereby retarding growth and development (see Solow, R.M. 1979).

Consequently, the monetary policy authorities must attempt to keep the money supply growing at an appropriate rate so as to secure a sustainable economic growth and maintain internal/ external stability. The discretionary control of money stock by the monetary authorities thus involve the expansionary or contractionary measures of money which influences the interest rate in order to make money cheaper or more expensive, depending on the prevailing economic and thrust of policy.

OBJECTIVES OF MONETARY POLICY

According to some renowned economic authors like Anyanwu, Jhingan and Okpara, they agree on the general objectives of monetary policy which are as follows; Maintenance of general price stability so as to restore confidence and maintain international competitiveness. Achievement of a high, rapid and sustainable economic growth thus, raising the general standard of living of the Nigerian masses. Maintenance of exchange rate stability in Nigeria Achievement of a high balance of payment (BOP) equilibrium in Nigeria. Ensuring that the rate of inflation in Nigeria is at its lowest possible level.

MONETARY POLICY FORMULATION IN NIGERIA

In formulating monetary policy, the CBN relies in the techniques of financial programming whose starting point is a comprehensive review of economic recent performance such as the current and anticipated economic problems. Projections are usually made on money supply, GDP growth, inflation rates and BOPs position.

On the basis of optimum money supply, the economy’s absorptive capacity for domestic credit is derived so as to permit growth targets which would act as determinants for key policy variables of money supply and aggregate domestic credit. This domestic credit is then allocated between the public and private sectors. The size been allocated to the public sector is been determined by the size of the fiscal deficit to be financed by the banking system. The residual is been allocated to the private sector.

DETERMINANTS OF MONEY SUPPLY IN NIGERIA

The supply of money in Nigeria based on its composition, appears to be determined basically by the behavior of three main economic factors. First, is the behavior of the banks concerning the amount of reserves that they decide to keep at any point in time. This amount given the fact that banks maximize profit in the long run, is influenced by the bank’s foresight and their perception of the economic activities surrounding them. Secondly, the behaviour of the non – bank public in dividing their money between currency and demand deposits. The larger the non-bank public’s marginal currency deposits and money supply resulting from it, the larger the monetary base or high – power money.

The monetary authorities in their decision to change the size of high powered money and in their right to set the legal reserve, uses the following instruments of money which can be direct or indirect. The direct tools include;

• Aggregate credit ceiling
• Exchange control
• Deposit ceilings
• Special Deposits or directives
• Stabilization securities

While the indirect tools include;

• Open Market Operations (OMO)
• Cash Reserve requirement (CRR)
• Liquidity Ratio (LR)
• Minimum Rediscount Rate (MRR) or Discount Window Operation (DWO) Parity Changes (PC)
• Selective Credit Deposits (SCD)

Moral Suasion

These direct monetary control tools which had been in vogue in the year 1960’s and 1970’s were retained in the 1980’s up to June 1986. They were not only to control overall expansion but also to determine the merchant banks asset portfolio, proportion of bank loans going to the proffered sectors and the total proportion of rural bank deposit granted as loans to rural borrowers.

However, the prolonged used of the direct tools had diverse effects on both the economic and the effectiveness of monetary policy in Nigeria. Hence, a decision was taken to change the strategy of monetary management to the indirect approach involving the use of market-based tools.

NIGERIA FINANCIAL INSTITUTIONS

The Nigerian financial system has witnessed rapid growth in the number of participating institutions including the scope and services rendered. It comprises of the regulatory authorities, banks, non bank financial institutions and markets. The regulatory authorities whose role is crucial for the functioning and orderly development of the financial system include;

• The Federal Ministry of Finance (FMF)
• CBN (Central Bank of Nigeria)
• NDIC (Nigeria Deposit Insurance Corporation)
• SEC (Securities and Exchange Commission)
• NAICOM (National Insurance Commission).
• FMBN (Federal Mortgage Bank of Nigeria)
• NBCB (National Board for Community Banks)

OBJECTIVES OF NIGERIAN FINANCIAL INSTITUTIONS

In an attempt to formulate certain broad general objectives for the financial system in terms of the promotion of rapid economic and social development, the Committee on the Nigerian financial system (1976), was of the view that the banking finance system should achieve the following aims; Facilitate effective management of the economy. Provide non-inflationary support to the economy. Achieve greater mobilization of savings and its efficient and effective channeling. Ensure that no viable project is frustrated simply for lack of funds. Insulate the economy as much as possible and as much as is desirable, from the vicissitudes of the international economic scenes. Effectively sustain the indigenization (ownership control and management) of the economy. Assist in achieving significant transformation of the rural sectors. Assist in achieving greater integration and linkages in Agriculture, commerce and industry.

SIGNIFICANT DEVELOPMENTS IN THE NIGERIAN FINANCIAL IN RECENT TIMES

Some of the witnessed significant transformations in the recent Nigerian financial system include the following: The promulgation of CBN Decree 24 of 1991 which withdraws the autonomy of the Central Bank and places it under the supervision of the Federal Ministry of Finance. The promulgation of the bank and other financial institutions Decree 24 of 1991 which placed more financial institutions under the supervision of the CBN. The promulgation of the failed Banks (Recovery of Debts) and financial malpractice in Banks, Decree no 18 of 1994, which has the responsibility to undertake the prosecution of bank officials and others who contribute to the collapse of banks. The promulgation of the money Laundering Decree no 3 of 1995 which primarily is to present re-cycling of drug money. The increase in the share capital of banks (both commercial and merchant to N500 million effective from January, 1997).

THE IMPACTS OF MONEY SUPPLY IN NIGERIA ECONOMY

A critical study of the statistical records of the ultimate policy goals of Nigerian economic position revealed that the annual records of the general price level had steadily decline too since 1980. Certainly, the unsatisfactory nature of the economic position has been attributed mainly to the policy implication and inefficiency /ineffectiveness in executions of the monetary policies.

From statistical records of the history of Nigeria in 1980s’, some of the positive impacts of money supply then were; It increased the volume of money in the economy due to excessive revenue generated during the oil boom. People held large amounts of money in their hands which increased their level of spending. There was increase in investment in capital projects that yielded huge returns to its investors. There was optimal allocation of scarce resources among sectors of the economy. It helped increased economic productivity in Nigeria.

Notwithstanding the advantages obtained as a result of expansionary measures of money by the CBN, there were greater negative impacts. They include; The existence of price instability as there were constant price fluctuations of goods and services. There was inflation even up to date

The inflationary effects led to the country’s devaluation in its purchasing power of money. To this effect, the Nigeria’s currency lost its value as recently, the value of dollar currency is far higher than the Nigerian currency. Productivity and output had declined in Nigeria hence mitigating the growth of real GDP (Gross Domestic Product). There is now capital flight from the Nigerian economy as less commodities are been produced. In case of available ones, they are been sold at inflationary prices. There is now reduction in the country’s foreign exchange as other international countries cannot trade with a country experiencing inflation.

There is now excessive unemployment rate as the managers employ the labor force who they can’t pay of their services. Even the employed vacancies are unstable as the workers can be retrenched at any time. The value (i.e. purchasing power) of money falls as people don’t have enough cash to expend on the consumer goods. This in turn, leads to wastages of the produced commodities as well as reduction in the producer’s profit or revenue.

CONTROL OF MONEY SUPPLY IN NIGERIA

To effectively put a curb on supply of credit in Nigeria, the following measures are necessary;

• The expansionary measures
• The contractionary measures

The expansionary measures deals with the government policy to increase the volume of money stock in the economy given the economic situation at that point in time. This motive of increasing the money credit makes the government to increase its expenditure and effect a proper regulation of the CBN on the Commercial Banks which in turn increases the economic productivity, output, investment and generally raises the economic growth of the country.

On the other hand, the contractionary measures are just the opposite. It refers to the government policy to increase the volume of money stock in the economy. They have the motive of reducing the credit supply by reducing its expenditure and adopting the reduction regulation of the CBN on the commercial banks which now decreases economic productivity, output and investment. This is turn stabilizes the amount of money stock in the country.

With these expansionary and contractionary measures, the government of Nigeria through its Central Bank, should continuously supply that elusive
optimal quantity of money that would support non-inflationary/deflationary economic growth and promote macro-economic policy (i.e. price stability, increased balance of payment  BOPs, favorable terms of trade  TOT, high level of employment of the labor union, output growth etc) as excessive money supply leads to inflation whereas excessive reduction in credit supply leads to deflation.

RESEARCH METHODOLOGY

INTRODUCTION

Research methodology covers such areas as research design, population of study – sample size and sampling techniques, instruments of data collection and its procedure. It is a medium used for data collection in order to ensure valid conclusions made at the end.

This chapter also aims at investigating the methods that will be used to determine the appropriate measurement of money being supplied in the economy and its impacts towards the real per capital growth of that economy. It invariably serves as a prelude to chapter 4 where the data is presented and well analyzed.

INSTITUTIONAL CONSIDERATION

In general, economic research is concerned with the measurement of parameters of economic relationship with the prediction (by means of these parameters) of the values of economic variables (Koutsoyiannis 1977).

Based on this, econometric methodology is adopted for the study in order to establish a simple accurate model. The choice of this econometric method is necessary since the work measures the quantity of money supplied and its impacts towards the economic real gross domestic growth.

ESTIMATION PROCEDURE

The method to be used for this work is the ordinary least square (OLS) method because it has the Best, linear, Unbiased Estimator (BLUE). Another reason being that its computational procedure is fairly simple compared with
other econometric techniques with data requirements not excessive.

Again, the mechanics of Least Square are simple to understand. The OLS methods will be used so as to use figures from several independent variables of monetary tools and regress than against imputation rate. Then, the computer software package to be used to obtain the results will be PC Give.

MODEL SPECIFICATION

The specification of econometric model is based on econometric theory and on any valuable information relating to the phenomenon being studied. In doing this, there are three steps viz; i.Determination of the dependent and independent variables ii.Theoretical a prior expectation about the size and signs of parameters of the function and, iii.Determination of the mathematical form of model (Koutsoyiannis, 1997:11)

Hence, the model to be adopted will specifically be based on the following functional relationship: GDP =F (RER, MS2, RIR)……..3.0
Equation 3.0 reads that real Gross domestic product (Real per capital growth) is a function of real exchange rate, broad money supply and real interest rate. However, to hold the influence of the random variable, the equation is explicitly transformed into the following:

GDP = β0 + Β1 RER + β2 MS2 + β3 RIR + Ui
Where: GDP = Real Gross Domestic Product or growth.
RER =Real Exchange Rate
MS2=Broad Money Supply
RIR=Real Interest Rate
β0=Parameter Constant
Ui=Error term
In the above equation, GDP (Real Gross Domestic Product) is the dependent variable (endogenous variable).

METHOD OF EVALUATION

The method adopted for evaluation of the model is the Multiple Linear Regression of Ordinary Least Square (OLS). The techniques used in the analysis are;

• Sign and Magnitude of parameter: These are suggestions about the signs of the parameters and possibility of their sizes. As regard to the magnitude of parameters, the β’s are either elasticities, propensities or the marginal magnitudes of economic theory (or are components of these parameters).
• Coefficient of Multiple determination (R2): Here, the adjusted (R2) will be used to test for the goodness of fit. The value of R2 lies between 0 and 1. The closer the R2 is to 1, the better the goodness – of – fit while, the closer the R2 is to 0, the worse the goodness – of – fit.
• t- test: This is used to find out or test for the statistical significance of the individual regression co-efficient. When this is done, the computed or calculated ratio (tcal) will be compared with the theoretical, tabulated or critical ratio (ttab) with n-k degree of freedom.
• f-test:A test of the overall significance of the entire regression plane. It is used to denote whether the joint impact of the explanatory (exogenous/independent) variables actually have a significant influence on the dependent variable.
• ndard Error test:This test helps in the decision on whether the estimate β0 and β1 are significantly different from zero. (β0 = 0 and / or β1 = 0).
• urbin – Watson Test:This helps to test the validity of the assumptions of non-auto correlated disturbances.

DECISION RULE

This is a decision rule taken in order to either accept H0 (null hypothesis) and reject H1 (alternative hypothesis) or to reject H0 and accept H1, depending on the calculated values and tabulated ratios. If computed t is higher than the critical (tabular) t value i.e. if t > t0.025, reject the null hypothesis and if otherwise, accept it. If computed F is higher than the critical value of F i.e. if F > F0.025, reject the null hypothesis and if otherwise, accept it. If (B½) > S (B1), reject H0, if otherwise accept it.

Note:When you reject the null hypothesis (H0), it means that the estimate in question is statistically significant, and when H0 is accepted, the estimate is statically not significant.

DATA REQUIRED AND SOURCES

In order to ensure an adequate and comprehensive research, secondary data of real exchange rates, broad money supply and real interest rates were collected from 1970-2007.
The relevant statistics were sourced or compiled from the CBN including their statistical Bulletins, Annual Report and Statement of Account and Economic and Financial Review, CBN website on http.//www.cenbank.org and certified statistics from the Federal National Bureau of Statistics (NBS).

PRESENTATION AND ANALYSIS OF RESULT

PRESENTATIONS OF RESULTS

The estimates from the regression carried out are presented and evaluated in this chapter. As stipulated in the previous chapter, the OLS and results of our model were estimated using a computer software package Pc Give 8.00.

The empirical results are presented in a table which shows the estimated parameters, their t-statistics and other diagnostic tests of equation. The result obtained from the estimation techniques are presented in the table below,

ANALYSIS BASED ON STATISTICAL CRITERIA (1ST ORDER TEST)

The coefficient of Multiple Determination (R2). This is used to check the goodness – of- fit. From the regression result, the value of R2 is 0.854028 which implies that in the Long run, 85% of the variations in real GDP is explained by the independent variables (real exchange rate, real interest rate and broad money supply.

Test of Significance of the Parameter (The t-test Statistics). The student t-test is used to determine the significance of the individual parameter estimate and to achieve this, we have to compare the calculated t-value in the regression result with the t-tabulated at n-k degree of freedom (df) and at 5% significance level and will be calculated under the following condition. H0:β = 0(not significant)

H0:β1(statistically significant)
Where β=Coefficient of the parameter
H0null hypothesis
H0Alternative hypothesis
Decision Rule:Reject H0 if T-cal > T-tab and accept if otherwise. From our data, n = 150 and k = 8 hence, dF= n – k = 150 – 8 = 142 at 5% level of significance. From statistical table, critical 70.05 = -1.960

From the table above, only β3 (RIR) is statistically significant while β1 (RER) and β2 (M2) are statistically insignificant. Thus, we conclude that β3 (RIR) has significant impact on real GDP whereas β1 (RER) and β2 (M2) has no significant impact on real GDP in Nigeria in the period under review.

The F – Statistics Test. This test is carried out to determine if the independent variables in the model are simultaneously significant or not. Hence, the analysis shall be carried out under the hypothesis below, HO: x1 = x2 : xk =0 (all slope coefficients are 0)

HO: x1  x2  xk  0 (all slope coefficients are not 0) Decision Rule:Reject H0 if F – cal > F – tab
Numeration: Degree of freedom is k-1 = 8 – 1 = 7
Denomination: Degree of freedom = n-k = 150-8 =142 at 5% level of significance. Table 4.2.1 below, analyses the result 118.68
From the result, since f-cal > ftab i.e. 118.68 > 2.01, we therefore reject the null hypothesis H0 and accept the alternative hypothesis H1 and conclude that all slope coefficients are not simultaneously equal to zero i.e. the independent variables are simultaneously significant).