Analysing the impact of money supply on economic growth: A panel regression approach for Western Balkan countries (2000–2023)

Abstract

This study used panel data analysis to investigate the relationship between economic growth and some selected macroeconomic variables such as the money supply, inflation, foreign direct investment (FDI), and government spending. The study used Fixed Effects (FE), Random Effects (RE), and Generalised Method of Moments (GMM) estimations to emphasise the importance of these variables in driving economic growth. The Fixed Effects model indicates that the money supply (M2) has a positive and significant impact on economic growth (coefficient of 0.032, p < 0.05), while inflation has a negative impact (coefficient of −0.045, p < 0.05). The Random Effects model shows comparable patterns, with money supply and inflation coefficients of 0.028 (p < 0.05) and −0.038 (p < 0.10), respectively. According to the RE model, FDI has a positive impact on growth (coefficient = 0.021, p < 0.10). However, government spending (GOVEXP) remains statistically insignificant in both scenarios. The GMM calculation confirms that money supply (0.027, p < 0.05) and inflation (-0.042, p < 0.05) have a significant positive and negative impact on economic growth, respectively. FDI contributes favourably with a coefficient of 0.024 (p < 0.10), while government expenditure is insignificant. Lagged GDP growth is a significant factor, with a coefficient of 0.215 (p < 0.05), indicating sustained economic expansion throughout time. The findings emphasise the importance of monetary policy, inflation management, and attracting foreign direct investment in encouraging long-term economic growth, while government spending appears to have less influence in the short run. These findings offer policymakers evidence-based recommendations for developing effective economic strategies.