Authors: Martin Pažický
Addresses: Faculty of Management, Comenius University, Odbojárov 10, 820 05, Bratislava, Slovak Republic
Abstract: In this paper, an attempt is made to evaluate the relationship between interest rate and inflation. The attention is paid to determine the power of the interest rate in times of quantitative easing. The effectiveness of the interest rate is seriously compromised in the light of ultra-easy monetary policy adopted by the majority central banks around the globe. Our aim is to define the principles influencing the price level in the real economy of the euro area. Using the test for cointegration between interest rate and inflation, we have not found any evidence of long-run relationship between given variables. The vector-autoregressive model (VAR) indicates a certain level of inflation response to changes in the short-term interest rate, but the response is not sustainable. We applied various econometric techniques, such as ARMA, ADL, or VAR models, to illustrate the relationship between inflation and short-term interest rate.
Keywords: inflation; interest rate; central bank; monetary policy.
International Journal of Accounting and Finance, 2018 Vol.8 No.4, pp.364 - 392
Received: 09 Dec 2017
Accepted: 26 Sep 2018
Published online: 08 Mar 2019 *