The Impact of Monetary Policy on Economic Growth in SEE Countries: A Multivariate Approach

Abstract This paper explores the effects of monetary policy on economic growth, focusing on key economic indicators—namely, the exchange rate, interest rates, and the broad money supply (M3). To capture a comprehensive view of each country’s economic landscape, additional variables such as inflation and the output gap are included. By examining these variables across a complex period, the study sheds light on the role of monetary policy. Covering the years 2007 to 2022, it analyzes nine Southeast European (SEE) countries— Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Hungary, Montenegro, North Macedonia, Romania, and Serbia. Among these countries, some are members of the EU, while others are in the accession process, suggesting shared approaches to monetary policy. The economic interconnections of these nations are evident in their cooperation through various regional and international organizations. This study applies panel data regression techniques, using fixed effects (FE), feasible generalized least squares (FGLS), and panel-corrected standard errors (PCSE) estimators. By comparing outcomes across these estimators, it highlights how monetary policy variables impact economic growth. To ensure robust results, multiple statistical tests were conducted before estimating the models. The findings reveal that broad money supply growth (M3) is the only monetary policy variable with a positive and statistically significant impact on economic growth. Conversely, interest rates on loans and official exchange rates did not show a statistically significant connection with real GDP growth. The output gap, however, proved to be a critical factor, with a positive, significant impact on economic growth, underscoring its importance for the economic dynamics of the SEE region. These insights provide a basis for further research on the role of monetary policy, specifically the influence of broad money supply growth (M3), in enhancing economic stability. For policy-makers, the results highlight the importance of bolstering liquidity and managing the output gap to promote growth. Practitioners, in turn, can benefit from closely monitoring these indicators for strategic planning purposes. This study’s uniqueness lies in its examination of monetary policy’s impact on economic growth within the SEE countries over a period that spans both the Global Financial Crisis and the COVID-19 pandemic. The main contribution of this paper is its identification of broad money supply growth (M3) as a driver of GDP growth, while interest rates and the exchange rate do not show significant effects. These findings provide valuable guidance for policymakers interested in fostering economic growth in the region.