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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.
INTRODUCTION
It has long been argued that monetary police play a critical role in every economy. The effect of monetary policy in an economy has been a critical research area for economists (Christiano, Eichenbaum and Evans, 1994; Bernanke and Blinder, 1992). Generally, monetary policy involves the use of interest rate and money supply to affect the level and movement of national income (Mukherjee, 2007). According to Osinubi (2006), monetary policy is the blend of measures instituted to regulate the supply, cost and value of money within an economy. Monetary policy also works to achieve stable and sustainable price level, maintain balance of payment and stable exchange rate as well as induce economic growth in the economy (Carlin and Soskice, 2006; Agbonlahor, 2014). Thus, an effective monetary policy mechanism ensures general macroeconomic stability. This has the tendency of fostering private sector development, which is the engine of growth.
Economic growth denotes a sustained increase in Gross Domestic Products over time (Mukherjee, 2007). A sustained economic growth is imperative for one major reason; it provides employment, income and tax revenues, which reduces poverty (Dollar et al., 2013). For this reason, studies into the drivers of economic growth have preoccupied researchers for decades. (see Solow, 1956; Romer, 1986; Rebelo, 1991; Barro, 1997; Rogers, 2003; and Oosterban et.al, 2002). Growth of developing countries, particularly
those of sub-Saharan Africa have been irregular (Fabyan, 2009). This has engrained poverty in these countries. The story is not different in small regions such as West Africa (Fabyan, 2009).
The relationship between economic growth and monetary policy has been on the table of most researchers for decades. This is as a result of some disagreement among economist with regards to the effect of money supply on the growth of an economy. Whereas some economist growth holds the view that the supply of money at given time in an economy determines economic growth (Matheson, 1980; Levine, 1997), others are doubtful of the role money supply play in an economy because they believe other factors may contribute significantly to economic (Robinson, 1952; Fry, 1997).
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