It will be recalled that amongst the major

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It will be recalled that amongst the major macroeconomic objectives of Nigeria and other economies is the pursuit of growth and maintenance of price stability. Using this yardstick, the outcome of inflation and money growth in Nigeria has been generally mixed. By definition, price stability in Nigeria refers to the achievement of a single-digit inflation rate on an annual basis. Indeed, this objective has not been achieved on a sustained basis. For example, in 1995 the rate of inflation was 72.8 per cent while the target of single digit inflation was achieved in only three (3) out of six (6) years, between 1995 and 2000. In fact, the single-digit inflation rate that materialized was attributable to a favourable agricultural harvest 3 . The performance of the real sector improved in 2001, with the real gross domestic product growing by 3.9 per cent. The major sources of growth were agriculture, manufacturing, merchandise, transportation, finance and insurance and government services. However, inflationary pressures accelerated as a result of the liquidity surfeit fuelled by expansionary fiscal operations and the lingering
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150 Musibau Adetunji Babatunde & Muhammed Isa Shuaibu structural bottlenecks that increased costs of doing business in the economy while the unemployment level remained high. The link between economic growth, money supply and inflation is a universal phenomenon and it is peculiar to every government in the world. There have been various studies that examined the possibility of a causal relationship between money supply, the general price level and economic growth. While most of these studies indicate monetary expansion as a spur to growth and inflation as an obstruction that negate growth, a few others have provided evidence to the contrary. Most researchers of the monetary perspective have argued persuasively that inflation is strictly a monetary phenomenon and that inflation occurs when the rate of growth of money supply is higher than the growth rate of output in the economy. This is the conventional monetarist linkage from the creation of base money to inflation when monetary authorities issue money at a rate that exceeds the demand for cash balances at the existing price level and the increased demand in the goods market pushes up the price level as the public tries to get rid of its excess cash holdings. It is the contention of these economists that the central banks can bridge the gap between growth and inflation by effectively coordinating monetary expansion in a bid to achieve a balanced interplay between them. Table 1 Some Selected Macroeconomic Aggregates (Average) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 M2 Money Growth 32.5 21.3 17.7 19.4 25.0 12.3 16.6 30.6 30.9 na CPI Inflation 6.6 6.9 18.9 12.9 23.8 10.0 11.6 8.5 6.6 15.10 Real GDP growth 3.0 3.8 4.7 4.6 9.6 6.6 6.5 6.0 6.2 na Source: Authors Computation from CBN Statistical Bulletin (Special Anniversary Edition). na implies not available Table 1 presents some monetary policy aggregates in the Nigerian economy between 1999 and 2007. For those variables that go in the same direction, high growth rate of M2 prompts high monetization of the economy and thus real GDP growth which in turn causes high inflation.
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