The Relationship between Money Supply and Economic Activity in Countries Dependent on Natural Resources

Enayati, Morteza, Yazdan Gudarzi Farahani


The aim of this article was to show the influence of money supply and positive and negative shocks on part of the real economy in countries with natural resources in the form of panel data model with the approach of vector error correction model (VECM). For this purpose, using information from GDP, money supply, bank credits, the general level of prices, capital, trade openness degree, government spending, direct foreign investment, natural resource abundance and institutional quality indices for the period of 1990-2013, the relationship between variables was assessed. The results indicate that in all cases negative monetary shocks had far more effects than positive monetary shocks in the same period. Positive monetary shocks had a negative effect on output growth, as in the case of implementation of monetary policy after a period based on adjustment of the price of manufacturing institutes, the load of monetary policy would be more transferred on prices and its effects on the production would neutralize, also by entering the variable of natural resource abundance and institutional quality index (the average of institutional quality indices) in the economy of these countries almost had significant effects on economic growth, but this effect is weak. The variable of credits assigned to the private sector has a significant positive impact on economic growth in these countries. The results also indicated a negative relationship between inflation rate and economic growth based on the theories outlined in this field. Error correction coefficient related to the speed of adjustment of the variables rather than monetary imbalances reflected this subject that the output growth compared to monetary imbalances (the surplus of the money supply) really reacts significantly.

Keywords: monetary policy, bank credits, economic growth, sticky price, New Keynesian, vector error correction model (VECM)

Classification JEL: E21, E42, E63

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