Linkages between monetary policy and Economic growth

In developing countries Economic growth plays an inexorable role. The monetary instrument like, inflation, interest rate and money supply determined the Economic growth to enhance the level of welfare of the economy. “Economic growth is steady process by which the productive capacity of the economy is increased over time to bring about rising level of national output and income” (Michel P.Todaro). So, in which study the various monetary instruments in which manner effect and how test these instruments determine the economic growth.

Now we are studied to underline the relationship between monetary instruments and economic growth. Inflation affect the economic growth , when in developing countries like Pakistan the inflation rate high and the economic growth tends to decreases. The inflation rate was 13.8% and the economic growth rate was 4.45%. According to Economic Survey of Pakistan in National Fiscal year 2010-2011 and when inflation rate decreases about 10.8% then in result the growth rate was increases by 5.3%.

According to Economic Survey of Pakistan in Fiscal year 2011-2012, Interest rate also affects the economic growth , but interest rate and money supply interrelated with respect to monetary policy because in monetary policy the interest rate and money supply are the tools of it when the central bank decreases interest rate then the money supply increases in this way the national income increases which shows that the economic growth increase.

The interest rate is 6% which shows that this time is best to enhance the investment it’s a golden period for the investors at the end we conclude that monetary instrument like; inflation, money supply and interest rate determined the economic growth. At the time, to estimate economic growth not to focus on money supply and inflation rate is very important tight monetary policy in terms of increase interest rate has significant negative impact on output. Money supply strongly positive impact on output that is positive, inflation and output negatively correlated. Economic growth is the key element to boost up the economy in the developing countries basically it’s a threshold to development.