Effects of monetary policy on economic growth in Zimbabwe

Abstract

This research examines the hypothesis of money neutrality in Zimbabwe. After studying the relevant literature on the effects of changes in money supply on real variables, it outlines the research design for a macro-level study on the impact of changes in money supply on real variables. The hypothesis is that there is a positive relationship between money supply and real variables (GDP). The researcher used real GDP as the dependent variable whilst money supply (M3), interest rate and government expenditure were used as explanatory variables. A VAR model has been applied using the country’s macroeconomic data from 1990 to 2017 which was obtained from ZIMSTATS and World Bank Open Data website. Impulse response functions and variance decomposition were used to analyse the impact of the explanatory variables on real GDP. The results suggest that money positively affects real GDP in the short run but in the long it is insignificant in influencing real output. This means that in Zimbabwe, money is non-neutral in the long run, but it is neutral in the long run. Government expenditure has an insignificant influence on GDP both in the short and long run whilst interest rate has a positive effect on GDP in the long run. The recommendations which were given are that the government; should use expansionary monetary policy to increase real GDP, demonetise the bond note as well as the RTGS and adopting the Rand, curbing inflation through increasing production and ensuring transparency in the manner in which loans are given.