Gross Domestic Product Growth, Money Growth Exchange Rate and Inflation in Sierra Leone

Abstract

GDP growth, money growth, exchange rate and inflation play critical role in the macroeconomic stability of an economy and have a direct effect on policy making process. This paper examines the relationship between exchange rate, GDP growth, money growth and inflation in Sierra Leone from 1980 to 2013 using descriptive statistics and regression methods for the data obtained from the world development indicators (WDI) data base. Inflation was the dependent variable while its potential macro elements were explanatory variables. The correlation result revealed that, there is an absence of multicollinearity among the variables in the model. The result of the long-run co-integrating relationship in the model shows that GDP growth has significant negative effect on inflation in Sierra Leone whereas exchange rate, foreign price level and money supply growth have a positive effect. Given the implication of these macroeconomic indicators, it is imperative on government to ensure that the liquidity specifications be broaden in order to incorporate foreign currency deposits held at commercial banks so as to establish efficient control over money supply. This study would be of great value to policy makers in facilitating macroeconomic stability.