Acta Univ. Agric. Silvic. Mendelianae Brun. 2017, 65(2), 745-757 | DOI: 10.11118/actaun201765020745

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

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

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.

Keywords: Interest rate, price level, money supply, GDP, VAR, Granger causality
Grants and funding:

The support of the Masaryk University internal grant MUNI/A/1025/2015 Risks and Challenges of the Low Interest Rates Environment to Financial Stability and Development is gratefully acknowledged.

Prepublished online: April 30, 2017; Published: May 1, 2017  Show citation

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Urbanovský, T. (2017). Granger Causalities Between Interest Rate, Price Level, Money Supply and Real Gdp in the Czech Republic. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 65(2), 745-757. doi: 10.11118/actaun201765020745
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