Regional effects of monetary policy on economic growth of ECOWAS : an S-VAR approach.

Abstract

The debate on the nexus between monetary policy and economic growth has become an on-going and interesting one both in the academia and among policy makers. More importantly is the relationship based on regional or monetary union, which has not received much attention especially in sub-Saharan Africa as against the much developed economies. In this paper, the Structural-Vector Auto Regressive (S-VAR) model was employed to investigate the interactions between some selected economic variables and growth in the Economic Community of West Africa (ECOWAS) monetary union from 1980:Q1-2015:Q4. These variables are oil price and commodity price volatilities, net domestic credit, inflation rate, exchange rate, money supply, monetary policy and gross domestic product growth rate. To start with, the study tested for the presence of unit roots in order to ensure the stationarity of variables. This was followed by the confirmation of long run relationship among the variables, using the Panel ARDL model. The result of the eight S-VAR variables reveals that oil and commodity price volatilities constitute important exogenous disturbances to monetary policy. The medium through which this works is the exchange rate; and from exchange rate to money supply. Finally, this effect is passed on from money supply to the growth rate of the gross domestic product. In addition, the Impulse Response Analysis and Variance Decomposition outcomes show exchange rate to be playing dominant role in determining the behavior of monetary policy within the ECOWAS region. In this regard, the supply of money is the major transmitter of all the interactions to the growth rate of the gross domestic product as it dictates the behavior of the GDP growth rate more than other variables in the S-VAR model. One policy implication from the results of this study is that the recent monetary policy tightening in most of the ECOWAS countries to mitigate the rise in inflation rate may adversely affect economic growth of the region. This is because investment may be discouraged as a result of high lending rate. Not only that, any monetary shock especially in terms of the exchange rate could have adverse symmetric effect on the economies of the region.