Assessing the Effectiveness of Central Bank Monetary Policy in the Afghan Economy Using the ARDL Approach

Abstract

Monetary policy involves the utilization of specific monetary instruments by the central bank to achieve predetermined economic objectives, primarily through the control of money supply and credit volume. It serves as a critical tool for economists and policymakers to steer the economy towards a desired trajectory, fostering national growth and development. Economic growth, unemployment, and inflation represent the most salient indicators for evaluating the state of an economy, and the interrelationship between these variables remains a core area of economic inquiry. Consequently, the primary objective of this research is to assess the effectiveness of monetary policies implemented by Da Afghanistan Bank (the central bank of Afghanistan) within the Afghan economic context. Specifically, this study examines the impact of the inflation rate, a key indicator influenced by monetary policy, on economic growth. The analysis utilizes the Autoregressive Distributed Lag (ARDL) econometric methodology, covering the temporal scope of 1390-1399 SH (approximately March 2011 – March 2021). The empirical findings indicate a statistically significant negative relationship between the inflation rate indicator and economic growth (GDP). Precisely, a one percentage point increase in the inflation rate is associated with a 0.5126 percent reduction in economic growth. Furthermore, the results demonstrate that liquidity volume and money supply exert a positive and statistically significant impact on economic growth. In accordance with the study's findings, indicators exhibiting a positive effect contribute to the enhancement of economic growth in Afghanistan.