Money Supply: Reeling from Policy Response


Friday, October 6, 2017 4:00PM / Proshare Research

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In recent times monetary aggregates, especially money supply dipped far below the central bank’s target as at July 2017, underlining the conflict between the banks intermediate target on money supply and its mandate on price stability. The present picture ring in the old economic saying “there is no correlated target between money supply growth and inflation targeting”.  

Unfortunately, policy makers can only aim at only one of the two. Such happenings thus make it imperative for us to take a study on the monetary aggregates. Certainly, the rate anchors such as exchange rate and monetary policy rate has long dictated the economic discourse. Thus, a switch from the rate anchor to the quantity will provide the needed balance in the on-going monetary discourse. 

Evidently many are of the opinion that there is a break down in the relationship between money supply and the overall macro picture. In addition, it camouflages the structural flaws of an economy.  One cannot write off such concerns in a global economy, where technology is on the rise and an unstable money supply velocity exists in an emerging economy like Nigeria. 

Certainly, the quantity anchor does not provide the overall picture but is part of the overall picture. This thus gives us an understanding of the direction of money and the choices that shape such direction. Therefore, understanding such choices and its impact on direction of fund flows is of greater concern. 

Empirically money supply does not move in tandem with cycle all the time, but components such as net foreign assets and credit to private sector provide the needed insight on the direction of the cycle. Therefore, in this particular edition of our Proshare Confidential, the study of fund flows and the choices that shape their direction is important; especially the individual fiscal and monetary responses to the cycle, thereby with their effect on quasi money, credit to government and credit to the private sector will be provided. Interestingly, it gives confidential the rare opportunity to either dispute or validate the on-going chorus of crowding out effect. 

In attempt to achieve those critical feat the currency ratio, nominal velocity, credit-GDP ratio and the money multiplier will be provided in this study. 

More than half way through the year, there was an effort to make comparison between the present monetary aggregate and the duo of economic recovery and growth plan. In a follow-up to our earlier write up on demonetization or monetization, we take a peep detour into India. 

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Previous Proshare Confidential Report (s)

1.   How Rail and Energy Will Deliver a Robust Economy for Nigeria – Aug 2017

2.   Too Big Government: The Hysteria of Developmental Quagmire – Jul 2017

3.   The Nigerian Debt Conundrum and the Need for Automatic Stabilizers – Jun 2017

4.   Article IV vs. ERGP - The Third Way – May 2017

5.   Lifting The Veil off The Financial Sector – Apr 2017

6.   Towards An Economic Model for Nigeria; Going Beyond Symptomatic Responses - The Panama Model – Mar 2017 

7.   FX Utilisation in January 2017-Symptoms of An Opaque Structure – Feb 2017 


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