Impact of Money Supply on Inflation Rate in Nigeria: Evaluating Threshold Effects

Abstract

The effectiveness of monetary policy remains a critical concern in developing
economies like Nigeria. In light of the recent surge in inflation and its
consequent economic distortions, this study investigates the threshold level at
which money supply influences the inflation rate in Nigeria. Employing
threshold regression analysis, the findings reveal a specific threshold of 60%
money supply growth. When money supply growth exceeds this 60% threshold,
it exerts a strong positive and statistically significant effect on inflation.
Conversely, below this level, the effect of money supply on inflation, while still
positive, is substantially less significant. The study concludes that a non-linear
threshold effect exists in the money supply-inflation relationship in Nigeria.
Thus, the study recommends that monetary authorities should implement
policies to maintain money supply growth prudently below this identified
threshold and pursue broader monetary frameworks that ensure
macroeconomic stability to anchor economic activities.