The Effect of Monetary Policy on Inflation and Growth

Abstract

Monetary policy plays a critical role in managing inflation and promoting economic growth, particularly in developing countries facing unique economic challenges. This study aims to analyze the impact of monetary policy on inflation and economic growth in developing countries during the period from 2020 to 2022, providing insights into how different monetary policy tools influence key economic outcomes. Utilizing secondary data from credible sources, including central bank reports and international publications, the study employs econometric methods such as multiple linear regression and Vector Autoregression (VAR) models. These methods help analyze the relationships between monetary policy variables (interest rates, reserve requirements, and open market operations) and economic indicators (inflation and GDP growth). The findings indicate that tight monetary policy effectively controls inflation but has varied impacts on short-term economic growth and investment. Brazil and India experienced significant economic downturns in 2020 but showed substantial recovery in subsequent years. Turkey maintained positive GDP growth throughout the period, while Indonesia exhibited gradual recovery. The study concludes that the effectiveness of monetary policy in controlling inflation and supporting economic growth largely depends on the specific economic context of each country. Policymakers in developing countries must consider structural challenges and tailor monetary policy frameworks to their unique economic conditions. Future research should extend the analysis to longer periods and include additional variables for a more comprehensive understanding.