The Impact of Interest Rate, Exchange Rate and European Business Climate on Economic Growth in Romania: An ARDL Approach with Structural Breaks

Mariana Hatmanu,Mihaela Ifrim,Cristina Cautisanu

doi:10.3390/su12072798

Abstract

The role of the interest and exchange rates in sustaining economic growth has been a highly researched subject. Therefore, this study examines the influence of the monetary policy interest rate, the real exchange rate and the business climate in the Euro area on the economic growth in Romania. For this purpose, we have applied a pre-test for structural breaks to identify the existence of structural breaks, followed by the traditional unit root tests and the unit root tests with structural breaks to verify the stationarity of the variables. The results of the Bound cointegration test led to the autoregressive distributed lag (ARDL) short-run model that measures the short-run impact of the interest rate, exchange rate and the business climate in the Euro area on the economic growth of Romania. Our findings show that in the short run, the economic growth is negatively influenced by the interest rate, and positively by the exchange rate. We also indicate that the business climate in the Euro area has mixed effects on the economic growth. Finally, considering the growing interdependence between the internal and external (European) business environment, the results are highly significant for handling the interest and exchange rates in sustaining economic growth.

Highlights

The study of the influence of interest rate and exchange rate on the economic growth in Romania is highly important, especially in the light of joining the Euro area
The results of this study show that in Romania, the monetary policy interest rate, the real exchange rate and the European business climate have significant influences on the economic growth
The results of Low and Chan [5] from a study covering Malaysia are in concordance with the results reported by Hossain [4], where the inflation rate plays an important role and indirectly influences economic growth through its effects on the interest rate and exchange rate

Summary

Introduction

The study of the influence of interest rate and exchange rate on the economic growth in Romania is highly important, especially in the light of joining the Euro area. Deepening the economic integration process involves, if not the adoption of the common monetary policy, the alignment of Romania’s monetary policy with the policy of the Euro area. The convergence of Romanian monetary policy with the monetary policy in the Euro area is justified on three levels, as follows: a growing business cycle correlation, similar responses of central banks to relatively symmetrical external shocks and the stabilization policies of the interest rates. Our study is built on four pillars, namely, the interdependence between the interest rate, the exchange rate, the economic growth and the business climate in the Euro area. This study belongs to the group of studies investigating the impact of interest rates and exchange rates on economic growth by relating domestic growth to the external business climate, measured by means of business climate indicators

Methods

Results

Conclusion