The Effect of Monetary Policy on Economic Growth: Empirical Evidence from BRICS Nations

Abstract The study attempts to empirically explore how monetary policy influences economic growth in BRICS nation. The interconnections shared by economic growth and monetary policy measures has been investigated by employing different statistical methods including fully modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS). Cointegration and causality analysis has also been utilized. Long term connections among the studied variables has been revealed by the co-integration test. The regression analyses demonstrated that money supply positively and significantly impacts the economic growth. The causality test also revealed significant linkages of the economic growth with money supply as well as with capital formation and interest rates. Other considered variables like annual population growth, nominal exchange rate and percentage of total natural resources to GDP were not found to have any connection with the economic growth of the BRICS nation. The results emphasize that among the factors studied, money supply most significantly influences economic growth of BRICS nation. Policymakers and the monetary authorities might gain useful insights from the findings. The monetary policy initiatives should be more focused to improve the overall economic development. The findings suggest to enhance the impact of monetary policy in the region through promoting greater financial inclusion. As broadening the access to financial services could potentially help in stimulating the economic growth. Furthermore, it is suggested to the monetary authorities of BRICS nation to make revisions in the existing monetary strategies. This revision should focus on improving aspects that do not currently support economic growth.