BA ISAGO UNIVERSITY

FACULTY OF COMMERCE

DEPARTMENT OF ENTREPRENEURSHIP

MASTER OF COMMERCE IN ECONOMICS

MONETARY POLICY AND ECONOMIC GROWTH NEXUS IN SUB-SAHARAN

COUNTRIES

BY

OARABILE K SEIPHEPI (0212310222)

A RESEARCH PROJECT PROPOSAL SUBMITTED IN PARTIAL FULFILMENT

OF THE REQUIREMENTS FOR THE MASTER OF COMMERCE DEGREE IN
ECONOMICS

SUPERVISOR: DR OSCAR CHIWIRA

NOVEMBER 2022

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Table of Contents

INTRODUCTION....................................................................................................................................3
BACKGROUND OF THE STUDY...........................................................................................................4
STATEMENT OF THE PROBLEM..........................................................................................................5
PURPOSE OF THE STUDY....................................................................................................................7
SIGNIFICANCE OF THE STUDY............................................................................................................7
DELIMITATIONS OF THE STUDY.........................................................................................................8
LIMITATIONS OF THE STUDY..............................................................................................................8
THEORETICAL FRAMEWORK..............................................................................................................9
EMPERICAL LITERATURE ...................................................................................................................9
Conceptual Framework ...................................................................................................................11
RESEARCH GAP................................................................................................................................11
References………………………………………………………………………………………………………………………….……….15

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INTRODUCTION

This research has been rekindled by the interest in knowing the relationship between

monetary policy and economic growth. Numerous studies, for example, The Role of

monetary policy in economic growth and development (Muhammad Ayub Mehar

2022) and Monetary Policy and Economic Growth in Developing Countries:

Evaluating the Policy Nexus in Nigeria Miftahu Idris (2019). The results proved that

financial development was a key component of monetary policy that has been

identified as the key driver for economic growth. Bhattacharya and Sivasubramanian

(2003) argued that there is a causal relationship between monetary policy and

economic growth using data from India from 1970-1999, and concluded that the

financial sector has a positive relationship with economic growth.

Monetary policy is defined as the financial policies adopted by the monetary

authorities of a country to achieve the country’s economic goals, while economic

growth is defined as an increase in the production of goods and services in a country,

Lyndon M. Etale and Godspower T. Oweibi (2019). Financial development has been

defined as the policies, factors, and institutions that facilitate efficient intermediation

and effective financial markets (Aghion et al., (2006).

Monetary policy is highly essential because it plays a stabilizing role in the economic

system by addressing imbalances that affect productivity and growth levels in

numerous ways. In every economy, the central or apex bank uses its instruments of

monetary policy to influence the liquidity level and the composition of interest rates

within the banking institutions by the prerequisite of monetary and banking stability

towards enhancing economic growth Sulaiman L.A. Migiro S.O. (2014)

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Fixed capital accumulation is believed to stimulate productivity and it is facilitated

by a developed financial system. Endogenous growth theory argues that economic

growth is facilitated by fixed capital formation (Barro, 1991). A well-developed

financial system should withstand fluctuations in an asset price that arises due to

fluctuations in forces of demand and supply. The main stem of the study is the

relationship between monetary policy and growth. It is assumed that the ideology is

that well-developed financial systems can mix various products to meet the demands

of a productive sector. In other words, a well-developed financial system promotes

productivity and ultimately catalyzes aggregate output, and the ideology that an

efficient financial system is likely to promote economic growth remains lacking

based on available empirical evidence and so the debate about the role of financial

factors remains on.

The key policy tool in managing financial systems is monetary policy. This suggests

that the efficiency and stability of the financial system including capital

accumulation, are outcomes of the monetary policy stance and its effects on the

economy Vera Ogeh Lassey Fidor (2015). Over the years many developing countries

including those in the Sub –Saharan Africa have been faced with problems in trying

to achieve sustainable development and growth, and issues aroused due to numerous

problems such as price instability, currency depreciation, decrease in foreign reserves

due to deteriorating current account positions, Mishkin (2007)

BACKGROUND OF THE STUDY

The study of macroeconomic variables like money supply and inflation rate on

economic growth has gained huge attention from both policymakers and researchers.

One common objective for all economies is to achieve a high growth rate of output

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 and low inflationary pressure. The Keynesian model, Okun’s law and Philips curve

imply that inflation and output move in the same direction in the short run while

aggregate supply curve move slopes upward(Mankiv,2016).Hence policy makers are

faced with a deep problem of attaining high levels of economic growth and low level

of prices. For another example, consider how managers of economies always

experience inflationary pressure as a result of the policies they implement in an effort

to achieve production growth. The asset model method also claims that .Given the

short-term rigidity of prices, an expansionary monetary policy tends to lower loan

costs, spur investment, and ultimately boost output. Contrarily, according to the

classical economists, slack monetary policy tends to increase prices proportionally,

which tends to raise nominal interest rates without hurting actual output because of

long-term price movement (Krugman, et al, 2018)

STATEMENT OF THE PROBLEM

It is evident that around the early 1980s numerous countries around the world including those

in Sub-Saharan Africa adopted various economic reforms, typically called the structural

adjustment program (McKinnon,1973); Shaw, 1973). The goal of the reforms was to

lubricate economic growth, through price and macroeconomic stability. The reforms

comprised removing import restrictions and cuts in government spending, privatization, loss

in value of the currency, and tight control of the money supply by the central bank. The

reforms were motivated by the financial repression-motivated model formulated by

McKinnon (1973) and Shaw (1973). The financial sector was the core of the structural

reforms and also because according to the World Bank (2013). Towards the end of the 1980s,

many low-income earning countries including those in sub-Saharan Africa faced

unsustainable amounts of both domestic and foreign debt. This caused investment stagnation

and economic growth and a decline in social spending and an increase in poverty. These

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countries went through financial reforms in the quest to raise long-term capital to finance

both government and business activity to lubricate economic growth. However, these reforms

failed sub-Saharan Africa in terms of growth (Mwega, 2003). The failure of these reforms led

to the emergence of many diverse and contradicting explanations on the nature of the

problems facing the development of Africa ranging from the neoclassical to the monetarist

school of thought.

The monetarist policy emerged in various stages. The first stage was the monetary policy

actions transit to interest rates, asset prices, and domestic currency exchange rates (Pétursson,

2001). The second stage comprises the evolution from the financial system to the rest of the

economy. This may include the effects on spending decisions, aggregate demand, and

unpredicted inflation.

However, not many studies have focused on Africa and less on Sub-Saharan countries. This

gap in literature poses several problems; one of them being the lack of a proper design in

monetary policy for sustainable growth and development. The gap in the literature review

shows that sub-Saharan Africa has been financial in nature and centered on monetary policy

dynamics and the empirical question that comes to the economist’s mind is

 Does monetary design and its implementation part of the solution to Africa’s slow and

stagnant growth problems?

 Does monetary policy answer for rapid economic growth through its impact on the

financial system and capital accumulation?

The study is also motivated by the fact that Sub-Saharans are yet to attain the desired level of

economic development. This study seeks to attain answers to the impact of monetary policy

and economic growth nexus in Sub-Saharan countries. It seeks to provide answers to some

questions raised and in the process add to the extant literature on the transmission

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mechanisms of monetary policy in the context of developing countries in Sub-Saharan

countries.

The study also seeks to shed some light on the question of the appropriateness of monetary

policy as a tool in the pursuit of enhanced economic performance. However, findings from

empirical work hold important implications for the appropriate policy responses for

developing countries, for issues like pressure in currencies for bank behavior and financial

stability, for capital formation, accumulation, and economic performance at large.

OBJECTIVES OF THE STUDY

The main aim of this study is to discover the finance growth nexus in Sub-Saharan Africa
with a focus on monetary policy transmission mechanisms. The specific objectives of the
study are:

 To examine the relationship between monetary policy transmission - and economic

growth in sub-Saharan countries
 To determine the causal relationship between monetary policy, and economic growth
in sub-Saharan Countries
 To inform policy recommendations

RESEARCH QUESTIONS
• What is the relationship between monetary policy transmission and economic growth?
• What is the direction of causal relationships between monetary policy and economic
Growth?

RESEARCH HYPOTHESIS
• Monetary policy has no effect on economic growth
• There are no casual relationships between monetary policy and economic growth

SIGNIFICANCE OF THE STUDY

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This study will contribute towards achieving a clear analysis of the effects of monetary policy
on economic growth of sub-Saharan Africa and help in discovering the best tools for
monetary policy in order to achieve economic growth. The study will also help determine if
the is any relationship between monetary policy and economic growth and its peculiar
influence on sub-Saharan Africa.
DELIMITATIONS OF THE STUDY
This research aims to analyze the effects of monetary policy on economic growth in Sub -
Saharan Africa. The process of analyzing the effects of a phenomenon includes an
investigation and analysis of available data and an interpretation of that data as well as the
use of qualified models to clearly come to a qualified. To analyze this, it is important to
understand the concepts of monetary policy and economic growth.
LIMITATIONS OF THE STUDY
This study will mainly depend on secondary data sources for analysis. The use of secondary
sources may not give an accurate depiction of the current situation as they may be outdated
and since economic growth is dynamic in nature and changes can happen in a short time. The
decision to use of secondary data sources and not primary data was influenced by time
constraints as attaining data that with an aim of analyzing a social and economic phenomena
will demand a large sample size.

THEORETICAL FRAMEWORK

Several theories exist in monetary economics that can be found to give theoretical support to

the relationship between monetary policy and economic growth. The three main theories

relating to the subject are the classical monetary Theory, the monetarist theory, and the

Keynesian Theory. However the. The study is attached to the Monetarist Theory to provide

theoretical background and justification for this study.

Monetarist theory

The theoretical foundation of this study is concentrated on the Monetarist Theory

which was anchored by Milton Friedman and emphasized that the money supply is a

vital factor affecting the economic welfare of a nation Friedman (1974), Friedman

argued that to promote a steady rate of growth in the economy money supply must

grow at a fixed rate rather than being controlled by regulatory authorities such as

apex banks. Friedman debated that the money supply is temporary, not just for bonds,

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but also for goods and services. Therefore fluctuations in the money supply would

have both direct and indirect impacts on expenditure and investments in a manner

that the demand for currency would depend on the rates of return on different

contending assets. The theory further contends that changes in money supply are the

most important determinants of economic growth.

EMPIRICAL LITERATURE

Positive Impact of Monetary Policy

The following are some examples of literature that promoted the classical school

of thought while advocating for the positive effects of monetary policy: Nwoko

and Ihemeje (2016) examine how the Central Bank of Nigeria's monetary policy

has affected accelerated swift and sustained economic growth using annual data

covering the years 1990 to 2011 [1]. The coefficient is examined using a tool

called the conventional multiple regression approach. The results show that

monetary policy instruments are effective in regulating both monetary and real

sector variables, such as employment, prices, output level, and the rate of

economic expansion. Due to its significant impact on economic sustainability,

and monetary policy, according to Duskobilov (2017), Monetary Policy is an

essential part of any economy's economic development plan. The author looks at

how monetary policy tools affect economic regulation in Uzbekistan by

evaluating the relationship between monetary policy tools and economic

development. The cointegration and error correction model's findings show that

monetary policy instruments have a long-term beneficial impact on economic

growth.

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 When the cointegration test, error correction model, and Granger causality

technique are used, the results show a positive, long-run, and short-run

association between monetary policy and economic growth, while the causality

test reveals a one-way relationship between money supply and economic growth.

In a comparable move, Dimitrijevi and Lovre (2013) examine some significant

changes to monetary policy by evaluating the circumstances in which the money

supply can operate as the catalyst for economic growth without having an impact

on inflation.

The negative impact of monetary policy on economic growth

Using annual panel data encompassing the sample period of 1993 to 2015, Younsi

and Nafla (2017) investigated the connections between financial stability, monetary

policy, and economic growth in 40 developed and developing countries. Panel data

regression models with fixed and random effects were fitted to ascertain how

monetary policy and financial stability affect economic growth.

Results show that indices of monetary policy have a detrimental impact on economic

growth, and consequently, on financial stability and development.

Results determined that the money supply, interest rate, and inflation rate have a

negative GDP per capita over the long run; the only variable with a positive sign is

the real exchange rate. This relationship between the variables was examined using

the Johansen cointegration and the error correction model. Adegboye, Olopade,

Adediran, Mathew (2017),

CONCEPTUAL FRAMEWORK

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Shows a summarized mind map of the problem statement. The figure below shows

the web of the possible relationship between monetary policy and economic

growth .1 and 4 shows the initial effect of monetary policy on economic growth

while 2 and 3 show reverse causality from economic growth to monetary policy and

financial development, while 5 and 5 represent feedback effect between monetary

policy and financial development.

5 5

Monetary Policy Financial development

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1 2 3 4

Economic growth

RESEARCH GAP

The review of past empirical literature as reported in the previous paragraphs

discovered a lack of consensus in the study findings of previous scholars. The lack of

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 consensus by past researchers leaves a research gap which indicated that more studies

are required on this subject. However his study was motivated by the need to

contribute to the literature of monetary policy economic growth nexus.

METHODOLOGY

Research philosophy/approach/design/econometric models

This study will address this research from three aspects the motivation behind the passion for

the role of monetary policy in the economy, research beliefs, and pursuits in conducting high-

quality research. The main driver for this research why It has gained so much interest and

excitement from conducting the research on the monetary policy and economic growth nexus

is that the passion for this research is rooted in research questions that are enthusiastic as well

as beliefs that there are still theoretically important questions that have not been addressed in

past studies. This research is based on the relationship between monetary policies on

economic growth as well as providing banks with suggestions on how to organize and

implement an effective monetary policy to achieve a stable and sustainable economy.

Econometric model

GDP = BMS + INT + CRR + LQR

Where:

GDP is Gross Domestic Product

BMS is the Broad money supply

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INT is the interest rate

CRR is the Cash reserve ratio

LQR is the Liquidity ratio

POPULATION & SAMPLING

The study will adopt annual data on 20 sub-Saharan African countries over a period of 20

years from 2000-2020. The countries used in the sample are based on the Sub-Saharan

emerging countries carried out by Kehl (2007) and Radelet (2010).

RESEARCH TECHNIQUES & PROCEDURES

The study will employ the following econometric model

For objective 1 Autoregressive distributed lag model (ARDL) will be used.

Autoregressive distributed lag model, where the dependent variable is a function of its own
past lagged values as well as current and past values of other explanatory variables. The
model requires that error terms should have no autocorrelation with each other. There should
not occur any heteroscedasticiy in the data, meaning that the variance and the mean should
remain constant throughout the model. This model is chosen because ARDL models are often
used to analyze dynamic relationships with time series data in a single equation framework.

For objective 2 Toda and Yamamoto (1995) and Dolado and Lutkepohl (1996)
(TYDL) Granger Causality Approach. The Granger causality test is a statistical
hypothesis test for determining whether one time series is useful for forecasting another. If
probability value is less than any level, then the hypothesis would be rejected at that level. A
variable is said to:

 Granger-cause another variable if it is helpful for forecasting the other variable.

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  Fail to Granger-cause if it is not helpful for forecasting the other variable

Sources of data

Time series data for the study variables covering years 2000 -2022 will be collected from
various annual reports from central banks and the statistics offices. The sources are
considered reliable sources for this kind of study. The gap between 2000 and 2022 will help
grow reasonable conclusions between monetary policy and economic growth.

VARIABLES OF STUDY

Gross Domestic product

GDP is used to proxy economic growth, viewed as an increase in per capita national output or
net national product over some time. It is considered growth if the rate of growth in total
output is greater than the rate of growth in population

Broad money supply (BMS)

Broad money supply represents the total volume of money available in the economy which

Comprises narrow money (that is, currency in circulation with the non-bank public and
current

Account balances with banks), and savings and time deposits as well as foreign denominated

Accounts balances.

Interest rate (INT)

Interest rate is either the cost of borrowing or the reward for saving money. In most
developed

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Economies interest rates are fixed by market forces and only indirectly influenced by official

Policy invention. But in most countries, the interest rate is an integral part of the monetary
policy adopted by

The central bank controls and manages the money supply in the economy. Interest rates affect
the cost of borrowing which, all things being equal, should lower demand for loans and curb
the growth of

Cash reserve ratio (CRR)

The cash reserve ratio is a Central bank regulation to set the minimum proportion of customer
deposits and notes that deposit money banks must hold in reserves rather than lend out. This
requirement is mostly in the form of deposits with the Central Bank or physical cash in the
treasury of the banks. It is used as a monetary policy tool to influence borrowing and interest
rates in the country by limiting the amount of money available for banks to grant loans.

Liquidity ratio (LQR)

It specifies the ratio of certain liquid assets and securities banks must maintain against their
Deposit liabilities. The Central bank prescribes whenever it so desires the percentage of
liquid assets that deposit money banks must maintain against their customer deposits. The
liquid assets considered are usually cash and short marketable securities including
government securities such as treasury

References

 Barro R. J. Economic growth in a cross-section of countries. Quarterly

Journal of Economics, 106, 407-444. (1991).

 Bhattacharya, P. C., and Sivasubramanian, M. N. Financial development and

economic growth in India: 1970–1971 to 1998–1999. Applied Financial

Economics, 13(12), 925 – 929 (2003).

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 McKinnon, R. I. Money and capital in economic development. Washington:

Brookings Institution (1973).

 Mwega, F. M. Financial Sector Reform in Eastern and Southern Africa. In T.

Mkandawire & C. Soludo (Eds), African Voices on Structural Adjustment in

Sub-Saharan Africa: Third World Press. (2003).

 Sander, H., & Kleimeier, S. (2004). Convergence in euro-zone retail banking?

What interest rate pass-through tells us about monetary policy transmission,

competition, and integration? Journal of International Money and Finance, 23

(3), 461– 492.

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