Dynamic Impact of Money Supply on Economic Growth in South Africa. An ARDL Approach

ABSTRACT: This study investigates the dynamic impact of broad money supply (m3) on economic growth (GDP) per capita in South Africa using time-series data from 1980 to 2016. The study has employed the autoregressive distributed lag (ARDL)-bounds testing approach to cointegration and error correction model to investigate the impact of m3 on GDP per capita. The model is specified with four macroeconomics variables, namely, Gross Domestic Product (GDP) per capita, Broad money supply (M3), Interest rate (INT), Inflation rate (INF). The findings reveal that there is statistically significant positive relationship between money supply and economic growth both in short run and long run. The government of South Africa should maintain consistency and follow “the Taylor rule” to allow money supply to increase at a steady rate keeping pace with the economic growth. In respect to such rule will help South Africa Reserve Bank to avoid the inefficiencies that caused by execution of discretionary policy.