Econometric Modeling of Inflation, Interest Rates, and Economic Growth Trend

Abstract

This study examines the dynamic relationship between inflation, interest rates, and economic growth using an integrated time-series econometric framework. The analysis applies descriptive statistics, Augmented Dickey-Fuller (ADF) testing, cointegration analysis, Vector Error Correction Modeling (VECM), Granger causality testing, and impulse response analysis. The results indicate that inflation, interest rates, and economic growth are interconnected through both short-run and long-run relationships. The illustrative results show an average inflation rate of 5.42%, an average interest rate of 6.15%, and average GDP growth of 4.36%. The VECM results indicate a negative long-run relationship between interest rates and GDP growth (-0.286) and between inflation and GDP growth (-0.352), while GDP growth shows a positive relationship with inflation (0.224). Granger causality results indicate bidirectional causality between inflation and interest rates, while interest rates significantly influence economic growth. Impulse response analysis further shows that an interest-rate shock initially reduces economic growth, with the negative effect gradually declining over subsequent periods. Comparative scenario analysis indicates that stable inflation combined with moderate interest rates provides a more balanced environment for sustainable economic growth. The findings highlight the importance of flexible monetary-policy management that balances inflation control, economic growth, investment, and financial stability.