The impact of Monetary Policy on Economic Growth in Zambia (1980-2022)

Abstract

This study investigates the dynamic relationship between monetary policy and economic growth in Zambia over the period 1980 to 2022, employing the Autoregressive Distributed Lag (ARDL) model. The research aims to contribute to the understanding of the intricate interactions between monetary policy tools and the long-term economic development of Zambia. The study utilizes a comprehensive data comprising key monetary variables such as money supply, interest rates, inflation rates, and exchange rates, alongside relevant macroeconomic indicators representing economic growth. This data is collected from reliable secondary sources which include Bank of Zambia, Zambia statistical Agency and the World bank. The Autoregressive Distributed Lag model, with its ability to capture both short- and long-run dynamics, is employed to discern the causal relationship between monetary policy and economic growth. Preliminary findings reveal a multifaceted relationship between monetary policy and economic growth in Zambia. Short-term dynamics may exhibit different patterns compared to long-term relationships, suggesting the presence of lags and adjustment processes. In summary, the study tested various hypotheses, and the outcomes reject the null hypotheses, signifying the importance of the examined variables. Notably, in the short term, a 1% decrease in the official exchange rate correlates with a notable 1.1004% surge in economic growth. Additionally, broad money growth exhibits a stimulating effect, contributing to a 0.0433% increase in economic growth for every 1% growth in broad money. Although real interest rates show marginal insignificance in the short run, they significantly contribute to long-term economic development, with a 0.1341% increase for every 1% rise. Furthermore, a positive association is observed between annual inflation and economic development, resulting in a 0.0515% increase for every 1% increase in inflation. The implications of the findings are crucial for policymakers in Zambia, offering insights into the design and implementation of monetary policy measures to foster sustainable economic growth. Additionally, the research contributes to the broader academic literature on the relationship between monetary policy and economic development in emerging markets, providing a case study that can inform future research in similar contexts. In conclusion, this study employs the ARDL model to explore the impact of monetary policy on economic growth in Zambia over the past four decades, offering valuable insights for policymakers, researchers, and stakeholders interested in understanding and fostering sustainable economic development in the region. KEY WORDS: Economic Growth, Monetary Policy, Inflation Exchange Rates, Interest Rates