How Real Interest Rate Influences Real GDP, CPI and Unemployment Rate in EU countries

Abstract

The article aims to use linear regression model to analyze quantitative correlation of real interest rate and three economic indices, namely real GDP, CPI and unemployment rate based on data of France, Germany and Italy. When the government tries to control the economic condition by adjusting interest rate, a clear quantitative correlation between interest rate and some important economic indices can make the consequence more controllable. A research based on real data can also help avoid mistake due to inconsistency between theoretical model and real life. As a result, the final model reveals that real GDP is negatively correlated with real interest rate, while CPI and unemployment rate are both positively correlated with real interest rate in short term, which is opposite to the initial expectation of CPI and unemployment rate. Such consequence may suggest the government to consider the possible opposite result in short term when they try to adjust the price level by altering real interest rate, as well as the unexpected change in unemployment rate.