Dynamic Parameter Model for Assessing the Relationship between Money Supply and Economic Growth in Nigeria

The research explores the dynamic relationship between money supply growth (M2) and GDP growth in Nigeria from 2008 to 2023 using a state-space modeling approach. The model effectively captures the relationship between M2 growth and GDP growth, highlighting the importance of M2 as an explanatory factor. The results show a low and statistically significant standard deviation of the observation error, suggesting the model explains GDP variations well. However, the state transition equation indicates a mostly deterministic evolution of unobserved state variables. While the model fits reasonably well according to the log-likelihood value, the study aims to address the limited empirical research on this relationship in Nigeria’s transitional, post-conflict economy. By employing a dynamic parameter state-space model, the researchers seek to capture the potentially changing nature of this relationship over time, moving beyond traditional econometric models that assume fixed relationships. The study draws on various macroeconomic theories, including the quantity theory of money, endogenous growth theory, and state-space models. The log-likelihood value shows that this model fits reasonably well, yet the study notes that other models & more macroeconomic factors should be examined further. Consistent with theoretical predictions, the results highlight the money supply’s vital role in economic growth. To deepen our grasp of how M2 relates to GDP growth, this study suggests that future research might explore more complex dynamics—such as non-linear associations and potential impacts of external shocks. These findings could significantly influence macroeconomic forecasting & monetary policy. The findings support theoretical predictions about the role of money supply in economic growth, but the study suggests future research should explore more complex dynamics, such as non-linear associations and potential impacts of external shocks.