CHAPTER ONE

INTRODUCTION

Background of the study

Monetary policy is one of the key drivers of economic growth, through its impacts on economic variables such as price, interest rate, GDP, national income. Economic growth is important in an economy as it reduces poverty as well as improving the standards of living.

The growing importance of monetary policy has made it effectiveness in having an influence in economic growth   which is the priority of most government. Despite the lack of agreement amongst economists on how monetary policy actually works and on the magnitude of its effect on the economy, there is a noticed strong agreement that it has some measure of effects on the economy (Nkoro, 2005).

Monetary policy as a combination of measures shaped to regulate the value, supply and cost of money in an economy, in relation to the expected level of economic activity (Falowewo and Osinubi, 200¬6). For most economies, the aim or objective of monetary policy includes price stability, Maintenance of balance of payments equilibrium, promotion of employment and output growth, and sustainable development.

The pursuit of price stability invariably implies the indirect pursuit of other objectives such as economic growth, which can only take place under conditions of price stability and allocate efficiency of the financial market.

Monetary policy aims at ensuring that money supply is at a level that is consistent with the growth target of real income, such that that non-inflation growth is ensured. Monetary policy influences economic growth through aggregate spending. Changes in money supply interest rates influence consumer spending as well as investment decisions. Consequently, aggregate demand changes in response to monetary policy adjustment.

Also, amongst the elements or objectives of monetary policy been mentioned, there is also inflation and money. For some decades now, anti-inflationary monetary policies the central bank of the CEMAC zone in view of sustaining economic growth.

Despite the low level of inflation recorded, the Economic growth of Cameroon remains fragile.  Analyzing the relationship between economic growth, inflation and money in circulation using a VAR model from the periods from 1960-2007. It is shown that an increase in money supply increases growth and the growth causes inflation. However, an increase in money supply does not necessarily increase inflation.

In Cameroon, the monetary policy is been implemented by the government through the central bank (BEAC), and its main objective is inflation targeting as an effective monetary policy. The low inflation is an important requirement for sustained economic growth became widely accepted after the great depression of the 1930s.

Thus, low inflation is always considered as an objective of economic policy, it has been shown that volatility reduces economic growth and it is therefore worthy for our attention (Klomp and Haan, 2009).

According to Motley (1994) and Taylor (1996), 1% increase in inflation reduces productivity by 0.03% and 0.25% respectively. And more, it had been shown that inflation aggravates the performance of financial markets. Thus all initiatives oriented towards financial development in the presence of inflation cannot boost growth. At the level of enterprises, inflation creates a doubting atmosphere for decision making and reduces capital efficiency.

Briefly, the central bank keeps a clean and solid growth which does not consider important money disequilibrium (Mamalepo, 2004). In spite of the relatively low rate of inflation(less than 4% per year), the rate of economic growth is fragile in Cameroon.

From 2003 to 2007 when the poverty reduction strategy paper (DSRP) was implemented, the GDP of Cameroon economy had mean real growth of 3.32% which is below the growth rate observed from the years 2000-2002 when Cameroon was not implementing any program to fight poverty.

There has been an evolution in the economy of Cameroon from the years 196-2007. From 1960-1980 there was prosperity based on the trend of real GDP growth rate. In 1973 and 1974, there was improvement in growth rates from 2.6% to 7.8%.

Then in 1975 the growth rate was negative (-8.2%) due to the oil crises and after that year, the growth rate gradually began to improve reaching a record of 18.4% in 1978 which is the period that deals with the exploitation of oil resources.

However the crises of the of mid 1980s had a great impact on the economy of Cameroon since the country experienced a serious recession between fiscal year 1986-1987 and fiscal year 1994-1995. During this period, the population growth rate was higher as compared to the economic growth rate, thus compromising government efforts in meeting with its social responsibility.

Since the fiscal year 1996-1997, the economic growth rate has been positive. In 2004 the growth rate in real terms was estimated at 3.6%, which marked a decline of 1.4% as compared to the previous year, Sectorial evolution at constant prices worked out to 4.6% for the primary sector, 0.7% for the secondary sector and 5.3% for the tertiary sector.  Efforts were undertaken through a number of programs to consolidate the results of this growth and in particular to ensure that its benefits extend to the poorest or poorest.

1.1 Problem Statement

Monetary policy takes in account actions of the Central Bank, such actions are to measure whether or not the expansion of money and credit will be adequate for the long run needs of the economy at stable prices.

Monetary policy is not the sole or unique macroeconomic instrument or tool. In Cameroon, the effectiveness and reliability  of  monetary policy has and is crucially depends on the stands of fiscal policy exchange rate, and on has also exerted  an important  influence on the economy mostly from the supply side.

According to Anyanwu(1993:53) monetary economic policy is a major economic policy stabilization weapon which involves measures designed to regulate and control the volume, cost, availability and direction of money and credit in an economy to achieve macroeconomic objectives or goals.

The lies in making use of a policy that will solve the economic problem rather than the economy, to have low levels of investment, income and also a reduction in the levels of demand and supply. Another problem is how to restructure the production and consumption pattern of the economy through the elimination of price distortion.

Another problem is the power response of financial system to monetary policies control measures, which has to do with lack of transparency in the operation of financial intermediaries.

1.2 Research Question

The research questions that will enable us carry out our research successfully are in two categories, which are the main and the specific research question. The main research in this aspect is;

1. What is the impact of monetary policy on economic growth?
2. The specific research questions of this study include;
3. What is the impact of monetary policy on living standards in Cameroon?
4. What are the impacts of monetary policy on the Gross domestic product in Cameroon?

1.4 Objective of the study

The main objective of this study is;

To examine the impact of monetary policy on the economic growth of Cameroon.

The specific objectives of this study include;

1. To determine the impact of monetary policy on Gross Domestic Product.
2. To examine the effect of monetary policy on interest rates.

1.3 Research Hypothesis

The proposed hypothesis to explain the relationship between monetary policy and economic growth are;

Main hypothesis:

H0: Monetary policy has no significant effect on economic growth in Cameroon.

H1: Monetary policy has a significant effect on the economic growth in Cameroon.