In particular inflation acts as a tax on productive

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neither Tobin’s nor Sidrauski’s results apply. In particular, inflation acts as a tax on productive activity and therefore retards capital accumulation in the cash-in-advance models studied by Stockman (1981) and Cooley and Hansen (1989, 1991) 7 . Stockman (1981) developed a model in which an increase in the inflation rate results in a lower steady state level of output and people’s welfare declines. In Stockman’s model, money is a compliment to capital, accounting for a negative relationship between the steady-state level of output and the inflation rate. Stockman’s insight is prompted by the fact that firms put up some cash in financing their investment projects. Stockman models this cash investment as a cash-in-advance restriction on both consumption and capital purchases. Since inflation erodes the purchasing power of money balances, people reduce their purchases of both cash goods and capital when the inflation rate rises. Correspondingly, the steady-state level of output falls in response to an increase in the inflation rate. Prior to this research, the basic growth model that relates growth to human and material capital and other resources or growth drivers have been the thrust of some empirical investigations examined in Nigeria. But the use of this model has been criticized by several authors on the basis of exclusion of money growth. For instance, Tobin (1965) argued that the role of monetary factors in determining growth cannot be overemphasized with respect to its role in determining the degree of capital intensity and thus growth of an economy. Findings of Iyoha (1969) reveal that there exist a clear relationship between money supply and economic growth. Others in Nigeria who have confirmed a strong relationship between money supply and growth include (Odedokun 1996; Okedokun 1998; Ojo 1993; Owoye and Onafowora 2007). These studies however did not consider the role of prices and capital at least within the Tobin’s model. The story being developed here indicates that an understanding of the macro-dynamic interlinkages between inflation, capital accumulation and economic growth is imperative. This is because while theoretical literature is quite emphatic about the relationship exiting between inflation, capital accumulation and economic growth, empirical literature is still ambiguous on the impact, direction, and the strength of the relationship across countries, regions and empirical methodology used.
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Money Supply, Inflation and Economic Growth in Nigeria 155 Theoretical Framework The theoretical underpinning explored in this study leans on the monetary version of growth model proposed by Tobin (1965) and seeks to establish the relationship between money supply, inflation and economic growth. In this model, portfolio proposition is put within a growth context. This framework is chosen based on its applicability and significance of its assumptions to the nature and structure of the Nigerian economy. Conspicuous among the assumptions of the model are that changes in money stock are concocted via lump sum transfers and the assumptions underlying the Solow growth model.
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