Effects of Monetary Policy on Economic Growth: Evidence from Some Developing and Developed Economies

The study examined the effects of monetary policy on the economic growth of some developing and developed economies. This study selected 33 countries grouped into 11 each as first group, second group and third group countries and showed how monetary policy have influenced their economic growth in the past 40 years, capturing the economic growth performances before and after the global financial crisis. This study is unique because it captures a broader range of countries compared to previous studies, uses updated data, and shows how monetary policy is transmitted through bank lending and financial intermediation. Furthermore, we use panel data and employ fixed effects to correct for the endogeneity that existed in the variables of deposit interest rate, inflation, log nominal GDP, log broad money, and how they affect the dependent variable (GDP growth rate). The exponential increase in money/GDP ratio for all the 33 countries shows that the size of these economies has grown considerably from 1980 to 2020. The panel data regression shows that the deposit interest rate and inflation were statistically significant while the log broad money and log GDP were not statistically significant at 5%. In the Fixed effect regression, all the variables were statistically significant and the same negative relationship of inflation and log broad money with GDP growth rate was observed as well. Also, the study shows that 1% increase in deposit interest rate leads to 8.5% increase in GDP growth, 1% increase in inflation reduces the GDP growth rate by 7.3%, 1% increase in log broad money reduces the GDP growth by 4.7% and 1% increase in log GDP drives the growth rate up by 14.3%. The economic indicators for the poor countries were not significantly affected by the IMF’s conditionality prescribing fiscal and monetary discipline and the explanation for the cross-country differences in growth rate can be explained by the production approach and institutional approach. From empirical findings, this study recommends that international financial institutions issue debt securities which can deploy domestic saving from high income countries to low-income countries, financial deepness and its structures and directing more credit towards non-financial corporations.