Impact of Monetary Policy on Economic Growth: A Case Study of South Africa

Abstract

This paper explores the role played by monetary policy in promoting economic growth in the South African economy over the period 2000-2010. The study employs the Augmented Dickey-Fuller and Phillips Perron unit root tests to test for stationarity in the time series. The Johansen co-integration and the Error Correction Mechanism are employed to identify the long-run and short-run dynamics among the variables. The study shows that a long run relationship exists among the variables. Also, the core finding of this study shows that money supply, repo rate and exchange rate are insignificant monetary policy instruments that drive growth in South Africa whilst inflation is significant. The study therefore recommends that monetary policies should be used to create a favourable investment climate that attracts both domestic and foreign investments thereby promoting a sustainable economic growth. The government should also increase government spending on the productive sectors of the economy so as to promote economic growth as monetary policy alone is unable to effectively spur economic growth.

DOI: 10.5901/mjss.2014.v5n15p76