Abstract
The aim of this study is to empirically estimate the sensitivity of inflation and interest rate together with some key macroeconomic variables on real economic activity index. Secondly, to investigate the direction of causality between inflation and interest rate, interest rate and real economic activity index, as well as between inflation and real economic activity index. Thirdly, to investigate how the real economic activity reacts to shocks from inflation and interest rate and other key macroeconomic variables. A deterministic time series regression model, vector autoregressive model, cointegration method and Granger Causality Analysis were implored in the analysis. The results show that there exists a unique long-run relationship between real economic activity and the other variables. Accordingly, inflation is identified as important determinant of real economic activity growth in Ghana. Conversely, real economic activity was found not to significantly determine inflation and interest rate within the period under investigation. The relationship between inflation and interest rate is, however, significant determined positive in either direction. This means that the link between inflation, interest rate and economic activity is not immediately automatic.
Highlights
Macroeconomic indicators such as inflation and interest rates have been the leading actor in economic growth for most developing and industrialized nations in the last decade
Economics 2015; 4(6): 118-124 inft is the rate of inflation at time t; exratet is the exchange rate at time t; intt is the interest rate at time t; mst is a measure of money supply at time t; oilpt is oil prices at time t to proxy external supply shocks which is treated as an exogenous variable since Ghana until recently that it discovered oil in commercial quantities was a small oil importing country and cannot influence the world market price of oil; and εt is the usual white noise error term
From fig 1 under section 2, we observe a general trend between interest rate series and real economic activity index series in the sense that, periods of high interest rates shows periods of relatively low economic activities and vice versa
Summary
Macroeconomic indicators such as inflation and interest rates have been the leading actor in economic growth for most developing and industrialized nations in the last decade. A study in south Asian countries shows a long-run positive relationship between GDP growth rate and inflation [1]. A consensus, exists, suggesting that macroeconomic stability, which is rooted in the spirit of low inflation, is positively related to economic growth. One of the macroeconomic growth factors is nominal interest rate and its fluctuating nature is closely related to inflation rate. A study in neighboring country shows that the behaviour of interest rate is important for economic growth in view of the relationships between interest rates and investment and investment and growth [3]. Actual interest rate is regarded as investment factor. It seems that demand for investment is not satisfactory in low interest rate
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