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Growth, inflation, interest rate and informality: Panel VAR evidence from OECD Economies

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  • Salim Ergene

    (University of Virginia)

Abstract

This paper attempts to examine empirically the dynamic relationship between inflation, growth and interest rate under the presence of informal economy by employing panel VAR techniques over the period from 1960-Q1 to 2010-Q4. The size of the informal economy is quarterly estimated to uncover the short run interactions between variables by following the two sector dynamic general equilibrium approach proposed in the literature. This paper empirically contributes that interest rate has a negative impact on both growth and the size of the informal activities, while inflation does not have a significant effect on them. The influence of interest rate on growth and the size of the informal economy is found to be robust to VAR order. The size of the underground economy has a positive impact on growth, however, the effects of growth on the size of the informal activities are not robust to VAR order. The causality from growth to the size of the informal activities depends on the order in the vector autoregression system. The empiric analysis proves that the fluctuations in interest rate are mostly carried out by the changes in inflation. The causal relation from inflation to interest rate is significantly stronger than the causal relation from interest rate to inflation.

Suggested Citation

  • Salim Ergene, 2015. "Growth, inflation, interest rate and informality: Panel VAR evidence from OECD Economies," Economics Bulletin, AccessEcon, vol. 35(1), pages 750-763.
    • Handle: RePEc:ebl:ecbull:eb-15-00027
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    References listed on IDEAS

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    Cited by:

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    2. Mustafa Kasim & Bentouir Naima, 2018. "The Relationship Between Inflation Rate and Nominal Interest Rate in Bolivarian Republic Of Venezuela: Revisiting Fisher’s Hypothesis," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 7(4), pages 214-224, November.
    3. Aziz N. Berdiev & James W. Saunoris, 2023. "The case for independence: Does central bank independence curb the spread of the underground economy?," Kyklos, Wiley Blackwell, vol. 76(3), pages 407-435, August.
    4. Afonso, Oscar & Neves, Pedro Cunha & Pinto, Tiago, 2020. "The non-observed economy and economic growth: A meta-analysis," Economic Systems, Elsevier, vol. 44(1).

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    More about this item

    Keywords

    panel var; inflation; interest rate; growth; informal economy;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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