THE IMPACT OF MONETARY POLICY ON SMALL BUSINESS GROWTH IN EMERGING ECONOMIES

Abstract

Monetary policy plays a decisive role in shaping the financial landscape in which small and medium-sized enterprises (SMEs) operate, particularly within emerging economies characterized by limited credit access and macroeconomic volatility. Using a two-decade panel dataset across eight developing countries, the analysis integrates policy interest rates, inflation dynamics, GDP growth, credit-to-SME ratios, and exchange rate volatility to evaluate how monetary conditions influence SME performance. Results indicate that higher policy interest rates consistently constrain SME growth by increasing borrowing costs and tightening credit availability, while inflation instability and external sector volatility further weaken business expansion. Conversely, stronger economic growth and improved credit penetration enhance the capacity of SMEs to invest and scale operations. The findings highlight the sensitivity of SMEs to monetary and macro-financial conditions and underscore the importance of predictable monetary frameworks, strengthened financial inclusion policies, and stable macroeconomic environments to support sustainable small business development in emerging markets.