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Granger Causalities Between Interest Rate, Price Level, Money Supply and Real Gdp in the Czech Republic

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  • Tomáš Urbanovský

    (Department of Finance, Faculty of Economics and Administration, Masaryk University in Brno, Lipová 41a, 602 00 Brno, Czech Republic)

Abstract

The main aim of this paper is to investigate relationships between selected macroeconomic variables - interest rate, price level, money supply and real GDP - in the Czech Republic in order to find out definite implications of its interactions and give recommendations to macroeconomic policy authorities. Two implemented vector autoregression models with different lag length reached slightly different conclusions. VAR(1) suggests that three pairs of Granger causality exist, in particular between price level and interest rate, between real GDP and interest rate and between real GDP and price level. VAR(2) uncovered two more pairs of Granger causality between money supply and interest rate and between money supply and price level. Despite better prediction power of VAR(2) in case of money supply, low correlation coefficient comprising variable money supply raises doubts about the factual existence of causality between money supply and other variables. However, both models allow forecasting the direction of change in case of variables interest rate and real GDP with the same success rate nearly 82 %. Both VARs also agreed that interest rate could be changed by change of price level and that interest rate could be changed by change of real GDP. These conclusions represent potential recommendations to macroeconomic policy authorities. For the purpose of further research, exchange rate variable will be included in the model instead of interest rate, because effect of interest rate turned out to be limited in times of weakened state of Czech economy.

Suggested Citation

  • Tomáš Urbanovský, 2017. "Granger Causalities Between Interest Rate, Price Level, Money Supply and Real Gdp in the Czech Republic," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 65(2), pages 745-757.
    • Handle: RePEc:mup:actaun:actaun_2017065020745
    DOI: 10.11118/actaun201765020745
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