Analysis Of The Impact Of Monetary Policy On Economic Growth In Namibia

Abstract 

This study sought to examine the impact of the monetary policy on Namibia’s economic growth within Common Monetary Area. The main objective was to empirically estimate the impact of changes in monetary policy on economic growth in Namibia.  This was done by regressing the changes in the repo rate with Gross Domestic Product growth rates, inflation rate and real exchange rate as independent variables. The sample consisted of 64 observations spanning from 2000Q1 to 2016Q4, using secondary data obtained from the Bank of Namibia and the Namibia Statistics Agency. To estimate the impact of the monetary policy, the Ordinary Least Square and Vector Auto Regression methods were used. The study notes that, firstly, the correlation coefficient statistics under the descriptive statistics show a negative correlation between repo rates, growth in GDP and the inflation rate. In addition, changes in the policy rate help to explain the rate of inflation in the long run as shown by the Granger causality test. Secondly, results from simple regressions indicate that an increase in the repo rate and average inflation by 1 percent points per quarter on average, reduce the growth rate. By the same token, VAR impulse response from the economic growth and inflation rate revealed that these variables decline in response to monetary policy shock. The GDP response to monetary policy shows that the impact lasts beyond the fifth quarter before growth recovers to initial levels, and inflation lasts less than a year before it settles at initial levels.  Furthermore, an increase in monetary policy causes the appreciation of real exchange rate in Namibia. This suggests that a degree of diversion from the anchor country’s monetary policy, enables policy makers in anchor countries such as Namibia to have an independent influence towards a favourable economic growth discretionally. The study confirmed that policy-makers are still able to stimulate the economy to a certain degree using the monetary policy instrument without disturbing the peg.