ABSTRACT

This study is is divided into 5 chapters, Chapter one includes the introduction background to the study definition of terms, statement of the problem, objectives of the study, hypothesis scope and limitations and significance of the study. Chapter two is made up of the literature review and other related literature regarding the topic under study and   Chapter three is based on research methodology and consists of the study area, sample size, research design, research instruments, like the instrument that will be used to analyze the data is, the statistical package for socials.  In collecting my data, I will use questionnaires To analyse the data, the study made use of Qualitative and Quantitative analysis. Qualitative analysis involves Descriptive statistics which was presented using bar charts, frequency tables and pie charts. The Quantitative analyses involves testing the hypothesis in the study and procedure of data collection and ethnical consideration while Chapter four focuses on data presentation analysis and findings, here reliability test was tested using IBM SPSS Statistics of 30, descriptive Statistics was also used to test result and inferential statistics was also use to determine performance using IBM SPP Statistics and lastly chapter five is focused on the summary of the work , recommendation conclusion and reference.

CHAPTER ONE

INTRODUCTION

1.1 Introduction

The relationship between the money supply and the level of national income has long been a cornerstone of macroeconomic analysis and policy formulation. Understanding how changes in the quantity of money circulating within an economy affect the overall value of goods and services produced is crucial for policymakers aiming to achieve macroeconomic stability and foster economic growth. Classical economists posited a direct and proportional relationship in the long run, primarily influencing the price level, while Keynesian perspectives emphasized the short-run impact of monetary policy on aggregate demand and national income through interest rate channels. In the context of Cameroon, a developing economy and a member of the Central African Monetary Union (CEMAC), this relationship takes on unique dimensions due to the supranational monetary policy framework governed by the Bank of Central African States (BEAC) and the specific structural characteristics of the Cameroonian economy. While BEAC sets the overarching monetary policy for the region, the transmission mechanisms and the ultimate impact on Cameroon’s national income may be influenced by domestic financial market development, the degree of openness of the economy, and the interplay with fiscal policies. This study seeks to examine the empirical relationship between money supply and the level of national income in Cameroon, taking into account the specific institutional and economic context of the country within the CEMAC framework. A clear understanding of this relationship is vital for informing effective macroeconomic policy decisions aimed at promoting sustainable economic growth and managing inflationary pressures in Cameroon.

This study is structured into five chapters to provide a comprehensive analysis of the relationship between money supply and the level of national income in Cameroon. Chapter one provides the background to the study, clearly states the research problem and objectives, formulates the research questions and hypotheses, defines the scope and significance of the study, and provides definitions of key terms. Chapter Two undertakes a thorough review of relevant literature, encompassing conceptual definitions of money supply and national income, a detailed exploration of pertinent theoretical frameworks such as the Quantity Theory of Money and Keynesian monetary theory, and a synthesis of existing empirical studies on the money supply-national income nexus, both globally and with a specific focus on African economies and Cameroon where available. Chapter Three outlines the research methodology employed, detailing the research design, the study area (Cameroon), the data sources, the variables under investigation, the data collection procedures, and the econometric techniques used for data analysis. Chapter Four presents the empirical findings of the study, including the results of the econometric analysis examining the relationship between money supply and national income in Cameroon. Finally, Chapter Five provides a comprehensive discussion of the findings in relation to the research questions and existing literature, draws conclusions based on the empirical evidence, and offers policy recommendations based on the study’s insights.

1.2 Background of the Study

 Money supply, globally, refers to the total amount of currency and other liquid assets available in an economy at a specific time, meticulously tracked by central banks to gauge liquidity and guide monetary policy (Federal Reserve Board, 2024; European Central Bank). Influenced by tools such as open market operations, reserve requirements, and key policy rates (Treasure Coast Bullion Group, n.d.), the management of money supply is a critical lever for central banks aiming to achieve macroeconomic stability, including price control and fostering economic growth. While traditional monetary theory, championed by figures like Friedman (1968), posits a strong link between money supply and nominal GDP, with long-run effects primarily on inflation, Keynesian perspectives (Mishkin, 2022) emphasize the short-run impact on aggregate demand and national income through interest rate channels. However, recent global empirical evidence (Investopedia, n.d.; Begum Rokeya University, 2024) suggests that this relationship is often more complex and less predictable than earlier theories assumed. Factors such as the level of financial market development (Anyambod, 2020), the credibility and independence of central banks, the prevalence of digital currencies and FinTech innovations (Anghelache & Anghel, 2023), and the interconnectedness of global financial markets all play a significant role in mediating how changes in money supply translate into economic outcomes across different nations. The surge in money supply in many developed economies following the 2008 financial crisis and during the COVID-19 pandemic, for instance, has led to debates about its impact on inflation and asset prices, with varying outcomes across different economic contexts (Banque de France, 2022; Exencial Wealth Advisors, 2024). This underscores the notion that the relationship between money supply and economic variables is not uniform globally and requires careful consideration of specific country characteristics and evolving financial landscapes.

The dynamic relationship between the money supply and the level of national income remains a central debate in macroeconomics, with evolving theoretical perspectives on its magnitude and transmission mechanisms. While traditional views ranged from the long-run neutrality of money (Friedman, 1968) to the short-run influence of monetary policy on aggregate demand (Mishkin, 2022), recent empirical work, particularly in developing economies and currency unions like the CEMAC, offers nuanced insights. Understanding this nexus in Cameroon is crucial, given its unique economic structure and its integration into a regional monetary policy framework governed by the Bank of Central African States (BEAC).

Recent research has specifically examined the impact of monetary policy and money supply on economic growth within the CEMAC zone, where Cameroon is a significant member. Fouopi Njiwoua and Tchakounte (2018) analyzed this relationship and highlighted the potential for weak or indirect transmission mechanisms, possibly due to underdeveloped financial markets and the dominant role of fiscal policy in the region. Their findings suggest that increasing the money supply might not always translate directly into higher national income as predicted by simpler models. Similarly, Mukete (2021) explored the impact of key monetary policy variables on economic growth in the CEMAC zone, using a VAR methodology and finding that variables like inflation rate have a significant impact, implying a complex interplay beyond a straightforward money supply-income relationship.

Furthermore, studies focusing specifically on Cameroon have investigated the broader effectiveness of macroeconomic policies. Amin (2021), as previously mentioned, emphasized the interaction between monetary and fiscal policies in Cameroon and the challenges faced by monetary policy in independently driving economic growth within the CEMAC context. Anyambod (2020) linked financial development to economic growth in Cameroon, suggesting that a more robust financial sector could potentially strengthen the transmission of monetary policy, including the impact of money supply on national income. However, the existing level of financial development and inclusion in Cameroon remains a critical factor mediating this relationship.

The relationship between money supply and the level of national income in Cameroon is a complex interplay influenced by its unique economic structure and its membership within the Central African Monetary Union (CEMAC). While standard macroeconomic theories offer frameworks for understanding this nexus, the specific context of Cameroon necessitates a detailed examination of recent statistics, data, and the prevailing economic environment.

Recent data from the African Development Bank (AfDB, 2024) indicates that Cameroon’s economic growth rate reached 3.8% in 2023, driven primarily by the forestry and services sectors, with private investment playing a significant role on the demand side. However, inflation rose to 7.4% in the same year, largely fueled by increasing food prices. This inflationary pressure suggests a potential link with the money supply, as a significant increase in the amount of money in circulation without a corresponding rise in output can lead to higher prices. Data from the World Bank (2023) shows Cameroon’s GDP at approximately USD 49.28 billion, with a GDP per capita of USD 1,466.77. The money supply, as measured by M2 (broad money), has shown an increasing trend as a percentage of GDP in the CEMAC region, rising from 35% in 2013 to 41% in 2021 (Nkafu Policy Institute, 2023). However, during this same period, economic growth in the CEMAC region, including Cameroon, saw only a marginal increase, suggesting that the expansion of the money supply has not proportionally translated into higher national income.

Several factors contribute to this seemingly muted impact. As a member of CEMAC, Cameroon’s monetary policy is primarily determined by BEAC, which sets regional targets and instruments. This implies that Cameroon has limited independent control over its money supply to directly stimulate national income. Research by Fouopi Njiwoua and Tchakounte (2018) on the CEMAC region indicated that the transmission mechanisms of monetary policy to real output are often weak, potentially due to underdeveloped financial markets and the significant influence of fiscal policy. In Cameroon, Amin (2021) also highlighted the crucial interaction between monetary and fiscal policies, suggesting that the effectiveness of monetary policy in driving economic growth is often contingent on the stance of fiscal policy.

The structure of Cameroon’s economy also plays a significant role. While the financial sector is developing, as noted by Anyambod (2020), a large informal sector and limited financial inclusion for a significant portion of the population can hinder the effective transmission of monetary policy. If a substantial part of the economy operates outside the formal financial system, changes in the formal money supply might have a less direct impact on overall economic activity and income generation. Furthermore, Cameroon’s reliance on commodity exports makes its national income susceptible to global price fluctuations, which can overshadow the effects of domestic monetary policy.

Recent studies have also explored the relationship between money supply, inflation, and economic growth in Cameroon. A 2025 study (ResearchGate) suggested a complex dynamic where an increase in money supply can lead to growth, and growth can cause inflation, but the direct link between money supply and inflation is not always straightforward. This implies that simply increasing the money supply might not automatically boost national income without triggering inflationary pressures, which can ultimately be detrimental to sustained economic growth. The BEAC’s primary objective is often price stability within the CEMAC region, which might sometimes necessitate a cautious approach to monetary expansion, even if there is a desire to stimulate economic growth in individual member states like Cameroon.

Moreover, the efficiency of the monetary policy transmission mechanism in Cameroon is influenced by the characteristics of its banking sector. Research by Takoulac et al. (2020) indicated that banks’ balance sheet characteristics, such as size and liquidity, can negatively affect the transmission of monetary policy through the lending channel. If banks are excessively liquid or risk-averse, an increase in the money supply might not necessarily translate into increased lending to the private sector, which is crucial for driving investment and economic activity that contributes to national income.

The relationship between different measures of money supply (M1, M2) and national income in Cameroon is complex, as highlighted by recent research. While an increase in M1 (currency and demand deposits) theoretically boosts immediate spending, its impact is moderated by financial inclusion levels (Anyambod, 2020). A rise in M2 (including savings and short-term deposits) indicates greater liquidity, but its translation to national income can be lagged and influenced by factors like preference for less liquid assets (ResearchGate, 2020). Data from CEIC (2016) provides a snapshot of M2, but linking it directly to national income requires econometric analysis. The effectiveness of these monetary aggregates in stimulating national income hinges on the efficiency of Cameroon’s financial system, the responsiveness of economic agents, fiscal policy coordination (Amin, 2021), and the regional monetary policy set by BEAC (Fouopi Njiwoua & Tchakounte, 2018), which may not always align with Cameroon’s specific economic needs. Studies like the one on inflation, money, and growth in Cameroon (ResearchGate, 2025) suggest a nuanced interplay where money supply can affect growth, but the relationship is not always direct and can involve inflationary pressures. Therefore, a disaggregated analysis of M1 and M2’s individual and collective impacts on national income components in Cameroon, using robust econometric methods and recent data, is crucial for a more precise understanding.

2.3 Statement of the Problem

  The pursuit of sustained economic growth and macroeconomic stability are primary objectives for Cameroon’s policymakers. The money supply, representing the total amount of monetary assets available in the economy, is a key variable through which monetary policy attempts to influence aggregate demand and, consequently, the level of national income. However, the precise nature and strength of this relationship in Cameroon remain a subject of ongoing debate and empirical investigation (Fouopi Njiwoua & Tchakounte, 2018). While established economic theories offer frameworks ranging from the long-run neutrality of money to the short-run stimulative effects of monetary expansion (Mishkin, 2022), the specific context of Cameroon – a developing economy within the CEMAC monetary union – introduces complexities that may deviate from standard theoretical predictions (Masson & Pattillo, 2005).

Several factors contribute to this uncertainty. Firstly, Cameroon’s membership in CEMAC implies that its monetary policy is largely determined regionally by BEAC, potentially limiting the alignment of monetary policy actions with Cameroon’s specific national income objectives. Secondly, the structure of Cameroon’s economy, characterized by a significant informal sector, varying levels of financial market development (Anyambod, 2020), and reliance on commodity exports, can influence the transmission mechanisms of monetary policy and the responsiveness of national income to changes in the money supply. Thirdly, recent empirical studies on the CEMAC region and Cameroon have yielded mixed results regarding the impact of monetary aggregates on economic growth (Mukete, 2021), suggesting that the relationship might be weak, indirect, or contingent on other factors such as fiscal policy (Amin, 2021) and financial market efficiency.

Furthermore, understanding the differential impacts of various monetary aggregates (M1 and M2) on national income in Cameroon is crucial for effective policy formulation. The extent to which changes in liquid assets (M1) and broader measures of money (M2) translate into increased economic activity and income generation requires careful empirical scrutiny, considering the specificities of the Cameroonian financial system and the behavior of economic agents. The potential for monetary expansion to primarily fuel inflation (ResearchGate, 2025) rather than real output growth also necessitates a nuanced understanding of the underlying mechanisms.

Therefore, the statement of the problem is that the precise relationship between different measures of money supply (M1 and M2) and the level of national income in Cameroon remains unclear and potentially deviates from standard theoretical predictions due to the country’s membership in the CEMAC monetary union, its unique economic structure, and the mixed findings of existing empirical research (Fouopi Njiwoua & Tchakounte, 2018; Mukete, 2021; Amin, 2021; Anyambod, 2020; Research Gate, 2025). A thorough investigation into this relationship, utilizing recent data and appropriate econometric techniques, is needed to provide evidence-based insights for policymakers in Cameroon seeking to leverage monetary policy effectively for sustainable economic growth and macroeconomic stability.

2.4 Research Questions

2.4.1 Main Research Question

• What is the relationship between the overall money supply and the level of national income in Cameroon?

2.4.2 Specific Research Questions

• What is the relationship between M1 (Narrow Money) and the level of national income in Cameroon?
• How does M2 (Broad Money) influence the level of national income in Cameroon?
• To what extent does M3 (Broadest liquid assets (money)) influence the level of national income in Cameroon?

2.5 Research Objectives

2.5.1 Main Research Objective

• To examine the relationship between the overall money supply and the level of national income in Cameroon.

2.5.2 Specific Research Objectives

• To determine the relationship between M1 (Narrow Money) and the level of national income in Cameroon.
• To analyze the influence of M2 (Broad Money) on the level of national income in Cameroon.
• To assess the extent to which M3 (Broadest liquid assets (money)) influences the level of national income in Cameroon.

2.6 Research Hypotheses

Based on the specific research objectives, the following null hypotheses will be tested:

 H₀₁: There is no relationship between M1 (Narrow Money) and the level of national income in Cameroon.

 H₀₂: M2 (Broad Money) has no influence on the level of national income in Cameroon.

 H₀₃: M3 (Broadest liquid assets (money)) has no influence on the level of national income in Cameroon.