The impact of monetary policy on the economic growth of a small and open economy : the case of South Africa

Abstract

This study evaluates the impact of monetary policy on the economic growth of a small and open economy like that of South Africa. Structuralists contend that changes in money supply (M3) and inflation (CPI) are not significantly related to changes in economic growth (GDP), while orthodox economists argue that they are. Structuralists also hold that monetary authorities cannot control M3, whereas orthodox economists believe they can. To structuralists, when monetary authorities pursue an expansionary policy, the opposite effect is achieved. Orthodox economists counter this argument. The ADT test statistic against the McKinnon critical values was used and it was found (i) that money supply changes and inflation are significantly related to changes in economic growth, and (ii) whereas monetary authorities can control M3 through the repo rate, they cannot keep it within set targets.