Bridging Growth and Inclusion: How Monetary Policy and Institutions Shape Development in Southern African Economies

Abstract

This paper examines how inclusive growth in Southern African countries depends on the monetary policy and institutional quality using a panel dataset of five nations (Botswana, Eswatini, Lesotho, Namibia, and South Africa) covering the period from 2008 to 2023. The analytic study starts by conducting a strict analysis of the stationarity characteristics of the panel variables using a modern panel unit-root test. It is then determined whether there is a relationship of long-run equilibrium between the variables using the Pedroni cointegration test, and therefore demonstrates the existence of the long-run linkages between the data. These empirical results confirm the theoretical speculation that the variables of inclusive growth, monetary, and institutional variables are cointegrated. Another specification that is taken up by the research process is the Pooled Mean Group-Autoregressive Distributed Lag (PMG-ARDL), which is a specification that permits the heterogeneous short-run dynamics with homogeneous long-run coefficients across cross-sections and, consequently, is able to isolate short- and long-term effects in a very subtle way. The estimate of the long-run relationship between inclusive growth and inflation indicates that inclusive growth is positively related to inflation with a significant level of statistical significance.  Although its contribution to an inclusive growth is also moderately high in the long-term, urbanization also has a moderately strong effect. Conversely, the institutional variables do not show statistically significant effects when the same is specified. Corruption control, in its turn, in the estimated model, the long-term impact of the interest rate, money supply, government efficiency, and political stability does not attain standard levels of statistical significance. The error-correction mechanism demonstrates that the models used in this paper are critical since it demonstrates that the economy will go back to the long-run equilibrium following deviations in the short-term. Overall, the findings demonstrate the need to preserve macroeconomic stability and enhance institutional arrangements to facilitate long-term and inclusive economic growth in Southern Africa.

Keywords: Inclusive Growth; Monetary Policy; Institutional Quality; PMG-ARDL Approach; Panel Cointegration; Southern African Economies