Dynamic Impact of Money Supply on Inflation: Evidence from ECOWAS Member States

Abstract

According to the monetarists, inflation is essentially a monetary phenomenon in the sense that a continuous rise in the general price level is due to the rate of expansion in money supply far in excess of the money actually demanded by economic units. But the link between changes in money supply and inflation is not instantaneous. This study, therefore, assessed this dynamic linkage between money supply and inflation in ECOWAS member states; West African Monetary Zone (WAMZ) and West African Economic Monetary Union (WAEMU) for the period 1980-2012. The stationary properties of the series are explored both at univariate and panel sense using KPSS and ADF; IPS and LLC. The results revealed that money supply and inflation are stationary at the level for individual countries and at panel sense. The random effect model for ECOWAS member states shows that the impact of money supply on inflation is effective in the current and first period .While the impact is effective in the first period for WAMZ, WAEMU experiences the impact in current period. The finding also reveals that there are significant specific-country effects on the variables. This implies that the objective of macroeconomic convergence is yet to be achieved. The paper, therefore recommends that inflation should be used as an operational guide in evaluating the effectiveness of monetary policy and also a strong monetary cooperation programme among ECOWAS member states should be evolved.