Does Monetary Policy Boost Economic Growth? The Case of Small Open Economy

Abstract

The main aim of this paper is to investigate the impact of monetary policy tools on economic growth in Azerbaijan during 2005-2018 using the Vector Error Correction Model (VECM). Also, different co-integration methods, namely, Johansen, DOLS, FMOLS and CCR were utilized for the robustness test. The outcomes of the different co-integration methods are consistent with one another and confirm the existence of long-run relationships among variables. Furthermore, the estimation results of VECM show that the monetary base and exchange rate have a positive and statistically significant impact on economic growth in the long-run, while the discount rate is insignificant. The paper concludes that the monetary base and exchange rate should be promoted by policymakers over other monetary policy tools during monetary policy implementation toward stimulating economic growth.