significance through both the Chisquare test value and Wald test confirmed this. This result is similar to the conclusion of many studies that have posited that an appropriate monetary policy mix that reflects the empirical relationship obtained in this studywould have a significant effect on the manufacturing growth rate and overall growth of most economies (see Olomola, 2007; Oladipo and Fabayo, 2012).
3.5 Summary and Conclusion
The model estimation is next and the fixed effect within group approach is used to estimate both the long-run and the short-run relationship between the monetary policy variables and the manufacturing growth rate. The results from the model estimation fall in line with the results obtained from the cointegration test as two of the monetary policy variables are significant in the short-run against none in the long-run.
Specifically, both exchange rates and net domestic credit show a significant relationship with the manufacturing growth rate in the short-run while none of the variables is significant in the long-run. Considering the tendency of existence of cross-sectional dependence in our analysis, we carried out a cross-sectional dependence test and the results show the presence of cross-sectional unit correlation. This can have negative implications on our analysis hence bootstrap values are used to conduct the panel cointegration test again. The results are similar to the previous ones on asymptotic distribution even after taking care of the cross-sectional dependence. The existence of a long-run relationship is also confirmed in one of the four tests.
Following previous studies, we use the dynamic panel analysis to estimate only the short-run relationship between monetary policy variables and manufacturing growth.
The results show an almost similar result to the fixed effects estimation. Net domestic credit, exchange rate and capital formation all show a significant relationship with the manufacturing growth rate in the dynamic panel analysis.
Explicitly, in the short-run, money supply shows an insignificant positive relationship, net domestic credit shows a significant negative relationship while exchange rates show a significant positive relationship with the manufacturing growth rate. Moreover, the over-all significance of the two model estimations, that is, both the fixed effect and dynamic panel analysis, show that they are both statistically significant. The F test of the fixed effect estimation, the Chi-square value and the Wald test in the dynamic analysis all confirmed this. The implication of this is that the combination of the monetary policy variables has a significant effect on manufacturing growth rate of the AOECs.
3.5.2 Conclusion
Some important conclusions can be made from the findings and inferences drawn from our empirical analysis. Firstly, we can conclude that based on the findings of this research, it appears that monetary policy has more transitory (short-run) than long run effects on the growth of the manufacturing sector of the AOECs. This is evident from the fact that we obtained a weak long-run relationship. A relatively large number of the monetary policy variables are individually statistically significant in the short-run, while in the long run all monetary variables are statistically insignificant.
Net domestic credit has shown a significant and negative relationship with the manufacturing growth rate. Consequently, our findings have shown that an increase in net domestic credit in the economy might not translate to the growth of the manufacturing sector. Further investigations show that in many of the AOECs there are indications that the bulk of net domestic credit does not go to the manufacturing sector.
Again, because credit diversion is noticed in many of these countries, selective credit control policies of some central banks appear not to be working for their manufacturing sectors. Accordingly, the aims of the monetary authorities are often not achieved and this has prevented the total credit in the economy from having a significant positive impact on manufacturing growth in the AOECs. The aforementioned findings could have been the reason why the money supply fails to have any significant impact on the manufacturing sector’s growth.
Furthermore, it appears that interest rates do not have any significant impact on growth of the manufacturing sector, both in the long and short-runs. This finding can be linked to the behaviour of the net domestic credit in the AOECs. Since interest rates are not showing any significant influence on the manufacturing growth rate, net domestic credit and money supply in the economy are not likely to have a positive effect on the manufacturing sector. Investigation has revealed however, that most of the developing nations still have a large number of people that do not have access to banking, and investment decisions are at times often based on profit and rate of return rather than cost
of capital. This has been limiting the effectiveness of interest rates in controlling the real sector of the economy of the AOECs. Despite this, the study has also shown that the level of inflation in AOECs is not a major factor determining the growth rate of the manufacturing sector.
In addition, exchange rates have demonstrated a significant positive relationship with the growth of the manufacturing sector. This has contributed to the growing body of literature showing that undervaluation of currency promotes growth of output in developing countries; although our results have also shown that this only happens in the short run. That is, the situation might be reversed in the long-run as exchange rates are usually prone to shocks.
Finally, findings in this study show that all the variables used jointly have a significant impact on the growth of the manufacturing sector in the AOECs. Therefore, to promote the growth of the manufacturing sector in the AOECs, an appropriate monetary policy mix that focuses more on boosting investment (capital) in the manufacturing sector through an increase in money supply should be embraced. Since currency valuation based on equilibrium exchange rate appears not to be working, monetary policy approaches might embark on alternative ways of boosting credit allocation to the manufacturing sector. This study has shown that a shortage of net domestic credit to the sector appears to be having an adverse effect on its growth.
In addition the study shows that the exchange rate has a positive and significant impact on manufacturing growth in the short-run. The implication is that the appropriate monetary policy mix to boost the growth of the manufacturing sector should also discourage overvaluation of currency. This approach has the tendency of restricting imports and encouraging exports.
CHAPTER FOUR
Monetary policy transmission mechanism and growth of the manufacturing sector in Africa’s oil exporting countries (AOECs).