Authors : Moses Balla Marah; Aiah John Kellie

Volume/Issue : Volume 9 - 2024, Issue 10 - October

Google Scholar : https://tinyurl.com/5n9bzvfd

Scribd : https://tinyurl.com/39fy5d6y

DOI : https://doi.org/10.38124/ijisrt/IJISRT24OCT1355

Note : A published paper may take 4-5 working days from the publication date to appear in PlumX Metrics, Semantic Scholar, and ResearchGate.

Abstract : This research investigated the transmission mechanisms of monetary policy and their impact on economic development in Sierra Leone from 1993 to 2023, aiming to evaluate their effectiveness in achieving key macroeconomic goals such as employment generation, balance of payments stability, and maintaining a relatively stable general price level. The study sought to understand how these transmission mechanisms influence economic development in Sierra Leone, particularly at a time when the country is grappling with significant macroeconomic challenges, including high unemployment, price volatility, and elevated inflation rates. Data spanning from 1993 to 2023 were collected from the World Bank Economic Indicators and Bank of Sierra Leone Statistical Bulletin through a purposive sampling approach. The research employed a blend of ex- post facto, longitudinal, descriptive, causal-effect, and correlation research designs. The statistical analyses conducted included the Augmented Dickey Fuller (ADF) unit root test, Granger causality test, ordinary least squares multivariate regression, generalized method of moments, Johansen co-integration, and vector error correction mechanisms. The findings revealed that capital stock (coefficient of 0.13), money supply (0.17), migrant remittances (6.5), and exchange rate (0.08) exhibited significant and positive long-term relationships with Sierra Leone economic development during the observed period. Conversely, the monetary policy rate (0.10) and credit to the private sector (0.30) demonstrated positive yet insignificant effects on economic development. Interest rates (-0.71) were found to have a significant negative relationship, while the inflation rate (-0.03) was negatively related but not significant. The study concludes that monetary policy transmission mechanisms have both short-term and long-term relationships with economic development in Sierra Leone, underscoring the importance of their effective implementation. Monetary policy transmission mechanisms have proven to be effective instruments for fostering economic development in Sierra Leone. It is advisable for both the Ministry of Finance and Bank of Sierra Leone, as the regulatory authorities, to consistently ensure an optimal combination of monetary policy tools. This approach is essential for significantly impacting economic activities, encouraging investments, and ultimately enhancing macroeconomic stability in the country. Furthermore, these regulatory bodies should regularly evaluate the monetary policy rate and the credit available to investors to create a favorable investment and business environment in Sierra Leone. Additionally, effective policies should be implemented to increase remittance inflows into Sierra Leone, directing investments towards productive uses rather than consumption, which may lead to inflationary pressures. The insights gained from this study contribute to the existing literature on economic development and the mechanisms of monetary policy transmission. The dynamic estimation technique, akin to the Generalized Method of Moments, effectively assessed the endogeneity between monetary policy variables and economic development in Sierra Leone.

Keywords : Gross Domestic Product per Capita, Interest rate, Monetary Policy, Monetary Policy Rate.

References :

1. Abeng, M. O. (2006). Financial sector reform outcomes in Nigeria: A quantitative evaluation. CBN Bullion, 30(2), 53-69.
2. Adalid, R., & Detken, C. (2007). Liquidity shocks and asset price boom/bust cycles. European Central Bank, Working Paper, 732.
3. Adefeso, H. A., & Mobolaji, H. I. (2010). The fiscal-monetary policy and economic development in Nigeria. Further empirical evidence. Pakistan Journal of Social Services, 7(2), 137–142.
4. Adigwe, P.K., Echekoba, F.N., & Onyeagba, B.C. (2017). Monetary policy and economic growth in Nigeria: a critical evaluation. Journal of Business and Management, 17(2),
5. Amassoma, D., Nwosa P. I., & Olaiya, S. A. (2011). An appraisal of monetary policy and its effect on macroeconomic stabilization in Nigeria. Journal of Emerging Trends in Economics and Management Sciences, 2(3), 232-237.
6. Amato, J., Filardo, A., Galati, G., Peter, V.G., & Zhu, F. (20005). Research on exchange rates and monetary policy: an overview. BIS Working Paper, monetary and economic department.
7. Aminu, U., & Anono, A. Z. (2012). Effect of inflation on the development and development of the Nigerian economy (An empirical analysis). International Journal of Business and Social Science, 3(10), 183-191.
8. Andrews, P., Astley, M., & Rummel, O. (2004). Projecting exchange rates in macroeconomic forecasts, mimeo, Bank of England.
9. Ang, J., & McKibbin, W. (2007). Financial liberalization, financial sector development, and growth: Evidence from Malaysia. Journal of Development Economics Elsevier, 84(1), 215-233.
10. Angeloni, I., Kashyap, A. K., Mojon, B., & Terlizzese, D. (2003). Monetary Transmission in the Euro Area: Where Do We Stand? In Angeloni, I., Kashyap, A. K.& Mojon, B. (eds.) Monetary Policy Transmission in the Euro Area, Cambridge: Cambridge University Press.
11. Anoruo, E. M. (2002). Stability of the Nigerian M2 money demand function in the SAP period. Economics Bulletin, 14(3), 179-181.
12. Antonios, A. (2010). Stock market and economic growth: an empirical analysis for Germany. Business and Economics Journal, 2010: BEJ-1.
13. Anyanwu, J.C. (2003). Monetary economics: Theory, policy, and institution. Onitsha: Hybrid Publishers Ltd.
14. Arevuo, M. (2012). Review: Keynes Hayek, The clash that defined modern economics, Extracted from http://www.adamsmith.org/research/. March 2017.
15. Arnoštová, K., & Hurník, J. (2004). The monetary transmission mechanism in the Czech Republic: Evidence from the VAR Analysis, mimeo.
16. Ashcraft, A. (2005). Are banks really special? New Evidence from the FDIC-induced failure of healthy banks. American Economic Review, 95, 1712–1730.
17. Ashcraft, A. (2006). New evidence on the lending channel.  Journal of Money, Credit and Banking, 38(3), 751–775.
18. Assenmacher-Wesche, K., & Gerlach, S. (2006). Understanding the link between money development and inflation in the euro area. CEPR discussion paper, 5683.
19. Audu, S., Yaaba, B. N., & Ibrahim, H. (2018). Money Supply, Output and Inflation in Nigeria: The Case of New Higher Order Monetary Aggregates. American Journal of Economis, 8(6), 289-302.
20. Ayodeji, A., & Oluwole, A. (2018). Impact of monetary policy on economic growth in Nigeria. Open Access Library Journal, 1-12.
21. Ayyoub, M. Chaudhry, I., & Farooq, F. (2011). Does inflation affect economic development? The case of Pakistan. Pakistan Journal of Social Sciences (PJSS), 31(1), 51-64.
22. Azeez, B.A., & Oke, M.O. (2012). A time-series analysis on the effect of banking reforms on Nigeria’s economic development. International Journal, Economics and Research.,  3(4), 26-37.
23. Babatunde, M. A., & Shuaibu, I. M. (2011). Money supply, inflation, and economic development in Nigeria. Assia-African Journal of Economics and Econometrics, 11(1), 147-163.
24. Bailliu, J., & Fuji, E. (2004). Exchange rate pass-through and the inflation environment in industrialized countries: An empirical investigation. Journal of Computing in Economics and Finance.
25. Bakare A.S. (2011). An empirical study of the determinants of money supply development and its effects on the inflation rate in Nigeria. J. Res. Int. Bus. Manage, 1(5).
26. Granger, C.W.J. (1969).Investigating causal relation by econometric models and cross-spectral methods. Econometric, 37(3), 424 – 438.
27. Granger, C.W.J., & Newbold, P. (1974). Spurious research in econometrics. Journal of Econometrics, 2(2), 111 – 120.
28. Greene, W.H. (2000). Econometric analysis 2 upper saddle River: NJ Prentice-Hall, (2000).
29. Greenwood, J., &Smith, B. D. (1997). Financial market development, and the development of financial markets. Journal of Economic Dynamics and Control, 21, 145-181.
30. Greenwood, J.,& Jovanovic, B. (1990).Financial development, growth and the distribution of income. Journal of Political Economics, 98(5), 1076 – 1107.
31. Gujarati, D.N., & Porter, D.C. (2009). Basic econometrics. (5^{th ed.}). Singapore: McGraw-Hill.
32. Gujarati, D.N. (1995). Basic econometrics, 3. New York: McGraw Hill.
33. Gujarati, D.N. (2001). Basic econometrics, 5. New York: McGraw Hill.
34. Jhingan, M. L. (2000). Monetary and banking international trade. New Delhi: Hampshire. Vrinda publications (P) Ltd.
35. Jhingan, M.L. (2007). Monetary and Banking International Trade, Delhi, Vrinda publications (P) Ltd.
36. Jimenez, G., Ongena, S., Peydro, J. L., & Saurina, J. (2012). Credit supply and monetary policy: Identifying the bank balance-sheet channel with loan applications. American Economic Review, 102(5), 2301–2326.
37. Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration – with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169 – 201. Retrieved from http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0084.1990.mp52002003.v/full.
38. Maddaloni, A., & Peydro, J. L. (2011).  Bank risk-taking, securitization, supervision, and low-interest rates: Evidence from the Euro-area and the U.S. Lending standards. Review of Financial Studies, 24(6), 2121–2165.
39. Mai-Lafia, D. I. (2002). Interest rate and availability for credit linkage in the Nigerian economy. Jos Journal of Economics, 2(1), 1-8.
40. Maku, A. O., & Adelowokan, O. A. (2013). Dynamic of inflation in Nigeria: An autoregressive approach. European Journal of Humanities and Social Sciences, 22(1).
41. Mallik, G., & Chowdhury, A. (2001). Inflation and economic development: Evidence from South Asian countries. Asian Pacific Development Journal, 8(1), 123-135.
42. Mandelman, F. S. (2011). Monetary and exchange rate policy under remittance fluctuations, Federal Reserve Bank of Atlanta, Working Paper 2011 -7.
43. Mbutor, O. M. (2010). Can monetary policy enhance remittances for economic growth in Africa? The case in Nigeria. Journal of Economics  and International Finance, 2(8), 156-163
44. Michael, B., & Ebibai, T. S. (2014). Monetary policy and economic development in Nigeria (1980-2011). Asia Economic and Financial Review, 4(1), 20-32.
45. Nnanna, O. (2001). The monetary policy framework in Africa: The Nigerian Experience. Retrieved in June 2017  from htp//www.resbank.co.za/internet/publication..../Nigeria.pdf.p.11
46. Nowbushting, B.M., & Odit, M.P. (2011). Stock market development and economic growth: The case of Mauritius. African Journal of Business Management, 6(8), 2985 – 2989.
47. Nwaobi, G. (2002).  A Vector error correction and non nested modeling of money demand function in Nigeria. Economics Bulletin, 3, 1-8.
48. Nwoko, N. M., Ihemeje, J.C., & Anumadu, E. (2016). Impact of monetary policy on economic development in Nigeria, An international Multi-disciplinary Journal of Ethiopia, 10(3), 192-206. 
49. Nwosa, P. I., & Saibu, M. O. (2012). The monetary transmission mechanism in Nigeria: A sectorial output analysis. International Journal of Economics and Finance, 4(1), 204-212.
50. Olusanya, S.O, Oyebo A.O., & Ohadere E.C. (2012). Determinants of lending behavior of commercial banks: Evidence from Nigeria, a co-integration analysis (1975-2010). Journal of Humanities and Social Science, 2(1), 125-135.
51. Olutoye, E. A., & Ayodeji, E. ( 2015). Cash reserve requirement and lending behaviour of banks to small and medium scale enterprises in Nigeria. International Journal of Banking, Finance, Management and Development Studies, 3(1), 23-34.
52. Peek, J., Rosengren, E. S., & Tootell, G. M. B. (2003).  Identifying the macroeconomic effect of loan supply shocks.  Journal of Money, Credit and Banking. 35(6, Part I), 931–946.
53. Phillips, P., & Perron, P. (1986). Testing for a unit root in time series regression. Biometrika, 75(2), 335 – 346.
54. Pisani, M. (2004). Financial openness and macroeconomic instability in emerging market economies, mimeo, Bank of Italy.
55. Sarno, L., & Taylor, M. P. (2002). Purchasing power parity and the real exchange rate. IMF Staff Papers, 49(1).
56. Seddighi, H.R., Lawier, K.A., & Katos, A.V. (2000). Econometrics. A practical approach. London; Routledge, 262 – 272.
57. Sede, I.P., & Ohemena, W. (2015). Socio-economic determinants of life expectancy in Nigeria (1980 – 2011). Health Economic Review, 5(2), 1 – 10.
58. Udude, C.C. (2014). Monetary policy and economic growth in Nigeria (1981 – 2012). Journal of Policy and Development Studies, 9(1), 234 – 246.
59. Umaru, A., & Zubairu, A.A. (2012). Effect of inflation on the development and development of the Nigerian economy: An empirical analysis. International Journal of Business and Social Science, 3(10).