Determining the effect of money supply as a ratio of GDP on economic growth in Kenya from 1985-2020

Abstract

The study investigated the relationship between financial deepening and economic growth using money supply as a financial deepening proxy. Data on GDP was used as proxy for economic growth. The study was based on financial intermediation theory backed up by other theories related to financial deepening. The study adopted a historical research design. A bivariate Autoregressive model (bVAR) was used in the study. Data were analysed using both descriptive and inferential statistics where. The findings reveal that a unit rise in the money supply as percentage of GDP will result in a 0.3215 unit decrease in GDP growth in the long run. This is because the money supply is harmful to the economy in the long run. There are controversies on the relationship between economic growth and financial deepening; that is, there are no universal conclusions on the nature of the relationship between financial d deepening and economic growth, and only a few studies have been done on the relationship between economic growth and financial deepening in recent years. The study established that money supply has a negative effect on economic growth in the long run in Kenya. In this regard, the study recommends that the government should tighten the monetary policy, which could either be through slowing down the open market operation activities such as floating of infrastructure bonds.