The Dynamics of Capital Flows, Monetary Policy and Economic Growth in the Southern African Customs Union

• Main Authors: Opeyemi Aromolaran, Olebogeng David Daw
• Format: Article
• Language: English
• Published: International Institute for Private Commercial and Competition Law 2021-06-01
• Series: European Journal of Economics, Law and Social Sciences
• Online Access: https://iipccl.org/wp-content/uploads/2021/09/662-681.pdf

This study examines the dynamics of capital flows, monetary policy and economic growth in the Southern African Customs Union spanning the period 1990 to 2019. The panel unit root tests were ascertained by the LLC, IPS and the CIPS tests while the Breuch Pagan LM, adjusted LM and the Pesaran LM CD test described the cross sectional dependence. The pooled mean group (PMG) and the Xtdcce2-cce (common correlated effects) produced the dynamics among the variables. It was found from the PMG estimates that foreign direct investment significantly affect per capita GDP in the short-run and long-run but foreign portfolio investment does not in either period while FDI is only negatively significant in the short-run in the xtdcce2-cce model. The monetary policy measures were found to have significant impact on per capita GDP. The results show that while the central bank policy rate differential significantly increases GDP per capita in the short run, it however decreases it in the long-run. Also, the broad money growth significantly promotes GDP per capita in the long run but reduces it in the short run. Inflation rate was also found to be significant both in the short-run and long-run exerting negative and positive effect respectively while in the context of the xtdccee2-cce model, it is only positively significant in the short-run. The xtdcce2-cce also shows that the central bank policy rate differential and broad money growth are significant as well as monetary sector credit to the private sector. The results show that while broad money growth and central bank policy rate differential stimulate GDP per capita, monetary sector credit to the private sector decreases it in the short-run. The ECM term conveys the evidence of long -run joint causality among the variables in the PMG model while it contradicts that of the xtdcce2-cce model. This study concludes that monetary policy and foreign direct investment are crucial determining factors of living standards in the Southern African Customs Union.