An Empirical analysis of the Effect of Money Supply and Economic Growth: Evidence From Sub-Saharan Africa
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Date
2026-06-02
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Addis Ababa University
Abstract
This study empirically examines the effects of money supply on economic growth in 12 Sub Saharan African countries over the period 1970-2023 using second-generation panel econometric techniques. The fixed Effects model (preferred by the Hausman test) reveals that money supply increases GDP by 0.022%. However, investment is the dominant driver of growth with an elasticity of 0.59155, which is approximately 27 times larger than money supply. The Westerlund cointegration test confirms a long-run equilibrium relationship, with the Pooled Mean Group (PMG) long-run estimation revealing a money supply elasticity of 0.02345 and an error correction speed of 31.2% per year. The Granger Causality test shows unidirectional causality from M2 to GDP, supporting the supply-leading hypothesis. Strong cross-sectional dependence exists for all variables, requiring regional monetary coordination. Substantial income group heterogeneity exists, with money supply elasticities varying from 0.089 (uppermiddle) to0.011 (low-income). Investment promotion should be the top priority (27 times more powerful than money supply). A one-size-fits-all monetary policy is inappropriate for heterogeneous SSA
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Keywords
Money supply, Economic Growth, Panel data, Fixed Effects, Heterogeneity