Impact of monetary policy on economic stability

Abstract

This research study investigates the impact of monetary policy on economic stability in Nepal sample commercial banks by developing a model that is able to investigate how monetary policy of the government has affected economic stability through the use of multi-variable regression analysis. We understudied the variables of monetary policy instruments to include: broad money supply (MS), average exchange rate (EXC), repo rate (REPO), and consumer price index (CPI). Economic stability was represented by Gross Domestic Product (GDP) at constant prices. Descriptive research design was employed and all our estimating variables were stationary at first difference except the component of interest rate which shows that our model interpretation would be spurious and a true representation of the relationships that exists between the explained and explanatory variables. To accomplish the purpose of the study, various analysis models were employed. From our result, all four variables (money supply, average exchange rate, repo rate and consumer price index) had a positive but fairly significant impact on economic stability. Measures of all this variables ratio on the other hand, had a positive but highly significant impact on economic stability which supports the assertion by Busari et al. (2022) that monetary policies are better suited when they are used in targeting inflation rather than in stimulating growth. In addition, regression analysis was done and showed the existence of a long run relationship between monetary policy and economic stability. Finally, our variables and the results showed the existence of auni-directional causality between money supply and economic stability. We recommend that partial autonomy should be replaced with full autonomy for the central banks, which is invariably subjected to government interference and its politics. Finally, monetary policies should be used to create a favourable investment climate by facilitating the emergency of market. The result supports the impact of monetary policy on economic stability of the country. It can reduce unemployment, promote investments and stabilize the economy so monetary authorities and policy makers should focus on healthy monetary policy for economic stability of the country.