AN IMPACT ANALYSIS OF THE RELATIONSHIP BETWEEN MONEY SUPPLY AND INTEREST RATE IN NIGERIA

The study examines the relationship between money supply and interest rate in Nigeria for the period 2000-2016. The study utilizes the simple linear regression model, using the ordinary least squares (OLS) technique. The pairwise Granger causality test was used to determine the causal relationship between money supply and interest rate, and result shows that a uni-directional causality runs from money supply to interest rate but not from interest rate to money supply. The Augmented Dickey-Fuller (ADF) unit root test method was applied to test for the stationarity of the time series variables, and results show that the variables were stationary at level. The OLS regression results show that money supply positively and significantly impacted on interest rate during the period investigated and that the regression model has a good fit as the coefficient of determination shows that 85% of the variation in interest rate was explained by money supply. Based on these findings, the study recommends that there should be a time-to-time moderate increase in money supply into the economy which will consequently reduce interest rate, increase investment and boost economic growth in the country; and that the Central Bank of Nigeria should pay special attention on broad money supply by regulating instruments like the liquidity ratio, reserve ratio, among others which directly affect broad money supply.