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Salim Ergene
''Growth, inflation, interest rate and informality: Panel VAR evidence from OECD Economies''
( 2015, Vol. 35 No.1 )
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.
Keywords: panel var, inflation, interest rate, growth, informal economy
E4 - Money and Interest Rates: General
Manuscript Received : Jan 08 2015 Manuscript Accepted : Mar 28 2015

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