DOI: https://doi.org/10.20535/2307-5651.15.2018.135936

THE EFFECT OF INTEREST RATE POLICY ON GDP DYNAMICS IN LATVIA

V.Y. Goliuk

Анотація


The aim of the paper is to study the impact of interest rate policy on gross domestic product dynamics in Latvia. Since the mid-90s economic activity in Latvia has been on a constant rise, its economy has shown one of the highest economic growth rates in the European Union - its gross domestic product has gone up approximately twice as fast as the average figure in the European Union.  Monetary factors were among the main drivers of economic growth in Latvia. Latvia is one of the post-socialist countries that have succeeded in using expansionary monetary policy to boost economic growth. To drive economic development the Bank of Latvia used short-term credits to commercial banks for liquidity maintenance, implemented credit auctions and Lombard loans. It also supported the money volume in the set parameters and adjusted the level of liquidity of commercial banks by changing the minimal reserve requirements. Credit expansion was conducted by monetary authorities under appropriate macroeconomic conditions - central bank of Latvia paid attention to control monetary supply, velocity of money, inflation, exchange rate and other macroeconomic indicators.

This study contributes to the statement concerning the role of interest rate policy in gross domestic product growth in Latvia. In the study correlation analysis has been exploited to analyze the association between real interest rate and gross domestic product dynamics in Latvia. The research results reveal that in 1996-2013 real interest rate was associated with gross domestic product growth in Latvia negatively, and the relationship was rather strong. Granger causality test has indicated that real interest rate caused gross domestic product growth in the short-term period, but in the long-term period (two and more years) gross domestic product growth caused real interest rate.


Ключові слова


interest rate policy, economic growth, gross domestic product, correlation, causality, Latvia

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Copyright (c) 2018 V.Y. Goliuk

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