was more concerned with the relationship between oil rent and economic growth in oil exporting countries in Africa. Other studies such as (Mohamed (2011), Corden and Neary (1982), and Acostal, Lartey and Moudelina(2009) were more focused on the issue of “Dutch Disease” in some oil exporting countries. None of these studies or any one that we are aware of focused on the manufacturing sector of the AOECs that has been described has a major sub sector in the real sector of the AOECs that can play an important role in economic diversification.
While there is a near consensus that monetary policy does not have a long run impact on growth, there are some studies that still contradict this (See Nelson and Plosser, 1982;
Tobin, 1965; Samba, 2013). Consequently, to provide a wider policy alternative that can help in promoting the growth of the manufacturing sector, this study explores the relationship between monetary policy and manufacturing growth in the AOECs using a panel cointegration analysis. Apart from allowing us to study the specific relationship between monetary policy and manufacturing output growth, the choice of panel cointegration will also allow us to verify if a long run relationship between the two variables exists in the AOECs or not.
not have an effect on the real variables (Nelson and Plosser, 1982). However, this argument has to do with whether a permanent change in money growth would have a long-term or short-term effect on interest rates, capital accumulation and output growth.
Briefly we shall assess these contributions as well as the empirical evidence on them sequentially.
In his model, Tobin (1965), examined a situation, which consists of agents saving for future consumption, only from their current income, by holding a cash balance or investing it in real capital assets. According to Tobin (1965), in such a situation, an increase in monetary expansion can lead to higher output growth. This assertion refutes the super-neutrality of money. The transmission mechanism through which this works, is that an increase in money, leads to higher inflation, which in turn reduces the rate of return on money and thus causes a portfolio shift in favour of real capital (Tobin, 1965).,The increase in capital stock, in turn, will lead to a rise in output per person in the long run.
After Tobin’s (1965) work, there has been an emergence of advanced theories on the relationship between money, inflation and growth (see for example Stockman, 1981;
Sidrausiki, 1967). These theories have challenged Tobin’s analysis, that monetary expansion would have a positive and lasting effect on growth. The characteristics of these theories are that they consider an infinitely-lived representative agent with optimistic utility behaviour and where money is supernatural. That is real variables, including the growth rate of output are independent of money supply growth in the long-run.
According to Papademoos (2003), despite the generalization, this has not led to a complete consensus, or robust conclusion, on whether money has a long-run or short- run effect on growth. According to him, in a theory where economic agents are infinitely lived and taking cognizance of some other assumptions, such as money being a compliment to capital, monetary expansion might not influence real interest rates as
well as economic growth.“Super-neutrality of money holds here” but if we consider the alternative approaches where “overlapping generations” are used, support is provided for Tobin’s theory under an explicitly optimizing framework, where an increase in inflation as a result of money supply growth, causes a shift to consumption of portfolio investment. The increase in capital stock can cause outputs to rise in the long-run.
Blanchard and Simon (2001), have also pointed out, that the conclusion of theories on the role of money, in growth, depends on the relationship between real monetary balance and capital, for instance, if they are complimentary, higher monetary balance and inflation may reduce capital accumulation and growth in the long run. This is because there is a “cash-in-advance” constraint on spending, since money balance is employed to finance consumption and investments. But the reverse is the case when monetary growth and capital are treated as substitutes, as in Tobin’s (1965) model. Therefore, different hypotheses on functions of money, lead to different and even conflicting conclusions on the size and signs of permanent effects of monetary expansion on growth.
However, some theories have also supported the view, that there exists a long-run relationship between monetary expansion and growth, but they maintain that such a relationship will be negative (see for example Fischer and Modigliani, 1978; Lucas, 1987, 2003). Their analyses were based on welfare cost of inflation. The cost of inflation, which includes the cost of economic institutional structures, clearly implies a negative effect of increase in monetary growth (inflation) on economic growth. The uncertainty caused by inflation impairs the price mechanism. Which affects its efficiency and this can be expected to have adverse effects on productivity and consequently on economic growth.
On the whole, studies have supported the view that monetary expansion, leading to a permanent rise in inflation, will adversely affect long-term growth (see for example
Lucas, 1987, 2003). Notwithstanding this, a few empirical studies have identified a positive and others a negative long-run relationship between higher monetary expansion and growth. Nonetheless, the rate of inflation must be confined to a relatively low rate.
This is in support of the position of Tobin (1965) and Alexey (2011), that a small dose of inflation might be necessary to promote growth and employment.
However, Papademos(2003),is of the opinion, that despite different positions on the negative effects of monetary expansion or inflation on growth, in the long-run it is still subject to consideration of empirical evidence. Consequently, we explore some empirical evidence to further examine the relationship between monetary policy and growth.
Nneka (2012), investigated the performance of monetary policy on the manufacturing sector in Nigeria. The study used interest rate, inflation rate, exchange rate, money supply, company tax rate and company lending rate as independent variables. A vector error correction model was used and Granger causality test was carried out among the variables. The study found a positive relationship between money supply and an index of manufacturing production, while other variables such as interest rate, inflation rate and exchange rate showed a negative relationship.
Alexey (2011), investigated the Dutch Disease and monetary policy in an oil-exporting economy with special focus on Russia. He employed a DSGE framework. The result showed that monetary policy, based on the Taylor principle, performs poorly in promoting economic growth of the oil exporting economy, while consumer price index, inflation targeting and exchange rate pegging, produce a more pronounced effect on the output level.
Onyeiwu (2012), examined the impact of monetary policy on the growth of the Nigerian economy. An ordinary least square estimating technique was used in the study. Results of the analysis showed that money supply has a positive impact on growth and balance of payment of the Nigerian economy, but a negative impact on the rate of inflation. The study recommended that monetary policy should be used to facilitate provision of a
favourable climate for investment through appropriate exchange rate, interest rates and liquidity management.
Ridhwana, De-Groot and Rietvelda (2011), examined the regional impact of monetary policy in Indonesia. The study used vector auto-regression to measure the regional impact of monetary policy shocks on regional output levels in Indonesia. From their results, the impulse responses derived from the estimated model, displayed variations in regional response to monetary policy shocks both in terms of magnitude and timing.
The study supported the view that regional responses to monetary policy depends on different sectors’ composition, especially the manufacturing sector. It was also deduced from the study, that a firms’ size was part of the reason for differences in regional responses to monetary policy.
Anthony and Mustafa (2011), studied the impact of the financial sector and monetary policy reforms on non-oil exports of the Nigerian economy. They employed cointegration and error correction mechanisms. The results showed that the monetary and financial sector liberalisation has a significant positive effect on the growth of non- oil exports in Nigeria, hence the need to sustain a deregulated monetary policy in order to promote the non-oil output in Nigeria.
Peersman and Smet (2002), using the European economy, examined the impact of a change in monetary policy on output, in eleven industries between the period1980- 1998. The study employed panel cointegration analysis and found that the negative effects of monetary tightening were more significant during recessions than in boom periods. The result also revealed the presence of cross-industry heterogeneity and that an asymmetric monetary policy effect was significant on the financial structure of the industries.
Gul, Mughal and Rahim (2012), examined the linkages between monetary policy instruments and growth in Pakistan. The method of ordinary least square was employed.
The results showed that monetary policy tightening, with appropriate balance adjustment, in inflation rates, exchange rates and interest rates will have a positive
impact on growth in Pakistan. However, they pointed out that evidence from previous studies has suggested that in the short-run, an expansionary monetary policy will likely have positive effects on growth.
Nenbe and Madume (2012), empirically assessed the role of monetary policy in maintaining macro-economic stability in Nigeria. The study made use of a cointegration and error correction model, the results revealed that there exists a long run relationship between monetary policy variables and macro-economic stability in Nigeria. Money supply was shown to have a significant positive impact on the growth of the country.
Ditimi, Nwosa and Olaiya (2012), examined the impact of monetary policy on economic stabilization using an ordinary least squares estimating technique. They found that a monetary policy mix involving exchange rates and money supply have a significant impact on the growth of the Nigerian economy. They also established a long- run relationship between monetary policy variables and the growth of the economy as a whole.
Sahinoz and Cosar (2010), assessed sectoral growth cycles and the impact of monetary policy on the growth of the manufacturing sector in Turkey. Using a vector auto- regression model (VAR), it was found that the Turkish manufacturing sector, responded to a contractionary monetary policy shock, through a pronounced reduction in output.
The degree of response varied from firm, to firm in the entire manufacturing industry of Turkey, with paper, chemical and paper product manufacturing firms being the most responsive.
Ibrahim and Amin (2005), assessed the relationship between exchange rates, monetary policy and manufacturing output growth in Malaysia. The study employed a VAR and found out that exchange rate shocks have a significant impact on manufacturing output - more than the overall growth of the economy. It was also shown that monetary policy tightening leads to a negative response from real activities. On the whole the study found that manufacturing output responds sharply to both monetary and exchange rate shocks more than the overall output of the Malaysian economy.