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

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 first country is not part of the EU but the last two are, but all of them non-Eurozone members. The analysis aims to investigate the influence of these variables on GDP, on one hand in the country which is still on its way to enter the EU and on the other hand for the two countries that are expected to enter the common monetary area. The paper examines existing theory to create an analytical framework for the impact of interest rate and inflation on GDP, then to quantitatively evaluate the importance of these variables for the economic growth in the three countries. 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 will be applied in so as to examine the relationships among the respective data series. Our target period is from 2000 until present time, offering both a relatively positive first period until the arrival of the debt crisis by the end of the 2000s, leading to strict austerity and deflationary gaps in most countries. Our basic aim is to investigate the links between monetary and fiscal measures, especially for developing countries that strive for economic growth without having a strong home currency