Monetary policy and economic growth in Rwanda.

Abstract

This research article focuses on the impact of Monetary Policy on GDP. GDP no doubt is affected by the Monetary Policy of the state. The research papers of various authors have been studied in this regard to prove the Hypothesis and after in depth analysis by applying Regression Analysis technique it has been observed that the relationship between the two exists. The data from 1999 to March 2013 has been used for driving the conclusion. In doing this, the Ordinary Least Squares Method (OLS) is used to analyze data between 1999 and 2013. The study proved that the Lending interest rate have minor relationship with GDP but the Growth in Money Supply and Nominal exchange rate greatly affects the NGDP of Rwandan economy, obviously various unknown factors also affects the GDP. Growth in Money Supply has a huge impact on GDP. The effects of stochastic shocks of each of the endogenous variables are explored using Error Correction Model (ECM). The study shows that Long run relationship exists among the variables. Also, the core finding of this study shows that exchange rate, M3 are statistically significant monetary policy instruments that drive economic growth in Rwanda. In short run, the lending rate is not significant variable explaining economic growth in Rwanda .Indeed it is statistically significant in long run, it’s impact on NGDP will be realized after quite 4 quarters.