The Effect of Money Supply on Economic Growth in Rwanda

Abstract

The purpose of this study was to assess the effect of money supply on economic growth in Rwanda. the study utilized quarterly time series data for the period of 2000-2015 and the variables considered are the ratios that were extracted and computed from data provided by the National Bank of Rwanda (BNR).The dependent variable was represented by economic growth which has as main indicator of real gross domestic product growth (real GDP), while the independent variable was represented by the broad money supply (M3) as a proportion of growth. In addition, five intervening variables were considered in order to control other components of the Rwanda macroeconomic environment that could influence the growth of the Rwanda economy. The study used Johnson co-integration technique to test the presence of long run between the study variables. Finally, the Fully Modified Ordinally Least Square (FMOLS) procedure was utilized to produce the model coefficients. From the empirical analysis, the result supported for a significant negative influence of money supply on the growth of economy (RGDP).This study therefore recommends Rwandan policy makers not utilize money supply to stimulate economic growth in both short and long relationship because of its inverse relationship with growth of economy.