The Role of Monetary Policy in Achieving Economic Growth in the Republic of Yemen During the Period (1990-2022) Using the VAR Model

Abstract

This study aimed to measure the impact of monetary policy, represented by broad money supply, average exchange rate, and interest rate as independent variables, on economic growth as a dependent variable during the period from 1990 to 2022 in Yemen. The study employed descriptive and analytical methods, including the Johansen test for cointegration and the Vector Error Correction Model (VECM). The results indicated that the central bank utilized modern tools alongside traditional monetary tools, significantly contributing to achieving the objectives of monetary policy. These tools included open market operations and the discount rate. In the econometric part of the study, three cointegration vectors were found among the study variables according to the impact and maximum eigenvalue tests. The application of the VECM revealed a long-term causal relationship between economic growth, money supply, exchange rate, and interest rate, with the error correction term (ECT) showing a negative and significant value. The study concluded that there is an active role for monetary policy in achieving economic growth; however, negative impacts from financial and monetary crises affect this growth. Consequently, the study recommends supporting the central bank to diversify foreign currency reserves with a basket of currencies in addition to the dollar and emphasizes the necessity for monetary policy to control the large money supply to achieve a balance between money supply and GDP, aiming for equilibrium between the real and monetary sectors. The study also recommends taking additional measures to enhance economic growth, such as increasing government spending on productive sectors.