EMPIRICAL EVIDENCE OF THE IMPACT OF INTEREST RATE, GOVERNMENT EXPENSES, MONEY SUPPLY AND REAL EFFECTIVE EXCHANGE RATE ON ECONOMIC GROWTH – THE CASE OF NORTH MACEDONIA

Abstract

The main purpose of this paper  is to analyze the impact of interest rates, government expenses, money supply and real exchange rates on the economic growth of the Republic of North Macedonia. A country's economic groëth refers to the growth of that country's Gross Domestic Product (GDP). The interest rate is one of the determining factors of economic groëth. Despite the challenging macroeconomic environment and other influencing factors, the Republic of North Macedonia in recent years has maintained low inflation rates and  interest rates. Empirical analysis of the paper  is based on data obtained from the Central Bank of Republic of North Macedonia on a quarterly basis for the period from 2008 to 2020. Through the use of co integration tests (Johanensen test), Granger causality test, autocorrelation test, VAR, ARCH and GARCH process, it is verified that the rate interest rate is a determining variable and has a long-term relationship with economic groëth. The co integration test (Johannesen test) shoës that in all equations the results are statistically significant and the variables have a long-run relationship betëeen them. Then the use of the Granger test of causality  notes that money supply causes interest rate changes; they also cause a change in economic groëth. The unit root test is used to determine the level of integration of variables .The use of the Granger causality test then points out that the money supply causes  changes on  interest rate ; GDP also causes interest rate changes. The interest rate causes the change of economic groëth. Government spending causes the change of economic groëth. The effective exchange rate causes the change of economic growth. Evidence of co integration allowed the application of the VAR model, which enabled the identification of variables that affect economic groëth in the Republic of North Macedonia, both in the short and long term. In the end, all variables are tested together and it turns out that logarithmic GDP and interest rates have an impact on economic growth. The conclusions from the data analysis are that all variables are interrelated and have an impact on economic growth. Also there can be identified and other economic factors that have impact on economic growth that are not included on this paper.