The interrelationship between interest rate, inflation, and Economic growth- A comparison between Germany and France

Abstract

Economic growth can be affected by fiscal policy, monetary and other policies drawn by its governments and central banks. Several factors determine economic growth, and interest rate is one factor that influences borrowers' behaviours to invest. And mitigate financial crises such as inflation, the dot-com bubble, the Lehman brothers, and the Pandemic crisis. The interest rate and in- inflation cause and effect relationship seem complex; empirical studies have shown a negative, positive, and neutral influence on economic growth. The new normal of monetary policy, like negative interest rates, is believed to impact growth positively. The side effect of such measures could lead to a higher inflation rate affecting household income, RGDP and economic growth. The thesis investigates the relationship and impact of interest rate, CPI and real gross domestic product in Germany and France featured long-term low inflation. Econometric analysis for Ger- many and France from 1991 to 2021 suggests that sustainable inflation is essential and significantly impacts economic growth. The findings of the thesis are demonstrated to conclude that the interest rate and the CPI rate positively correlated with the economic growth of Germany and France. In Germany, the Interest rate does not affect economic growth; inflation has a low effect. In France, the Interest rate is very low, affecting economic growth; inflation has a low effect.