The Effect of Monetary Policy on Economic Growth in the Ecowas Countries

Abstract

An effective monetary policy mechanism ensures general macroeconomic stability which can foster private sector development an engine of growth. A sustained economic growth provides employment, income and tax revenues, which reduces poverty. Despite the number of studies on monetary policy and economic growth, there are however disagreements with regards to the impact of monetary policy on economic growth. Whiles some researchers argue that money supply determines economic growth at certain times, others believe that some other factors are significant contributors to economic growth hence are doubtful of the role money supply play in economic development. This study therefore empirically explored the effect of monetary policy on economic growth in ECOWAS countries. Data for this study was sourced from World development indicators, for 14ECOWAS countries covering the period 2000-2017. The model for the study was estimated using the panel regression techniques. The study found that money supply, exchange rate, interest rate and gross fixed capital formation has a significant effect on economic growth of ECOWAS countries. Whilst the exchange rate and interest rate influence economic growth of the ECOWAS countries negatively, money supply and gross fixed capital formation relates to economic growth positively. The study therefore recommends that, the Central Banks of the ECOWAS countries should strengthen the monetary policy accountability and credibility to maintain a short, medium, and long-run focus on improving their Monetary Policy frameworks. This can be done by obtaining the optimal money supply that would sustain economic growth in these countries.