Abstract
Macroeconomic variables such as interest rates, inflation and exchange rates play a vital role in the economic performance of any country. The main objective of this paper was to investigate the effect that changes in the inflation and interest rates have on the Gross Domestic Product (GDP) in Ghana over a period of thirty one (31) years from 1980-2010. Data were collected from Bank of Ghana publications and bulletins, Ghana Statistical Service, the Institute of Statistical, Social and Economic Research (ISSER). The paper employed multiple linear regressions to establish that there exists a fairly strong positive correlation between GDP, Interest rate and Inflation, but Inflation and Interest rate could only explain movement in GDP by only 44 percent. The paper further established that, there existed positive relationship between inflation and GDP and interest rate is negative. It is recommended among others that the Government together with the Bank of Ghana should develop and pursue prudent monetary policies that would aim at reducing and stabilizing both the micro and macroeconomic indicators such as inflation targeting, interest rate, so as to boast the growth of the economy.
Highlights
For all countries, both developed and developing, one of the fundamental objectives of macroeconomic policy is economic stability
This relationship is supported by literature as reviewed above that if inflation is rising the central bank raises the interest rate, meaning that the cost of borrowing increases so the amount of money borrowed by individuals and companies decreases which in turn decreases the amount of money in the economy resulting in low economic output and for that matter Gross Domestic Product (GDP)
This is corroborated by the coefficient of inflation rate in the regression model developed above in table 2
Summary
Both developed and developing, one of the fundamental objectives of macroeconomic policy is economic stability. According to Frimpong and Oteng 2010, a high rate of inflation beyond 14% will always hurt GDP, the reason for Bank of Ghana monetary planning committee always targeting a single digit rate. Macroeconomic variables such as inflation, interest rate, exchange rate etc. Whiles these policies might be good, the effects of these macroeconomic variables on the economies of developing countries has not been well established. The general objective of the study was to investigate the effect of changes in the inflation and policy rates on the Gross Domestic Product (GDP) of Ghana over the period
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