Impact of interest rate and inflation on GDP in Bulgaria, Romania and FYROM

Abstract:

The influence of interest rates and inflation on GDP growth has been the subject of long debates and many research studies: from purely theoretical analysis of the channels through which this is accomplished, to empirical studies on a broad panel of countries. Because of these shared arguments about the impact of interest rates and inflation on GDP growth, as an area of investigation in this paper we took FYROM, Bulgaria and Romania.

The paper examines existing theory to create an analytical framework for the impact of interest rate and inflation on GDP, and to quantitatively evaluate the importance of these variables for economic growth. A cointegration analysis with three variables (interest rate, inflation and GDP growth) and a Granger causality analysis are implemented to examine the relations between these variables. Unit root tests are applied to examine the relationships among the respective data series.

The target period is from 2000 until present time, offering a relatively positive first period until the advent of the debt crisis by the end of the 2000s. The basic aim is to investigate the links between monetary and fiscal measures, especially for developing countries that are striving for economic growth without a strong home currency.