IMPACT OF MONETARY POLICY VARIABLES ON ECONOMIC GROWTH IN RWANDA (1996-2022)

Abstract

The general objective of this work is to investigate the impact of monetary policy Variables (Natural logarithm of Money Supply, Natural Logarithm of Exchange rate, Lending Interest Rate, inflation, Foreign Direct Investment and Government Expenditure) on Economic Growth in Rwanda From 1996 to 2022. a researcher had set the specific Objectives which were to assess the trend of monetary policy Variables and to find out the Long run and short run relationship between monetary policy variables and Economic Growth From 1996 to 2022. Autoregressive Distributed Lag Model was used to see if monetary policy variables are statistically significant or not to affect Natural Logarithm of Gross Domestic Product both in the long run and short run. The short run results revealed that the Error Correction Term is negative (-0.864289 %) and statistically significant to affect Economic Growth. The ECM results indicate that Foreign Direct Investment affect Economic Growth Positively whereas Lending Interest rate affect Economic Growth negatively in the short-run with medium -0.864289% speed of adjustment of Economic Growth to the long-run equilibrium path. The Long run results indicate that Monetary Policy variables considered under the study except Money Supply and Lending interest rate affect economic growth both positively and negatively as they are statistically significant. The diagnostic tests revealed that the specified econometric model met the assumptions of Classical linear regression model (CLRM). Researcher has recommended monetary authority to use both Monetary and Fiscal Policy tools in controlling inflation in Rwanda for its effective as there are other factors which can led to inflation which has not been considered under the study.