The Impact Of Inflation And Interest Rates On Economic Growth In West Africa（1985 To 2020）

This study investigated the relationship between inflation rate and interest rate and economic growth in eighteen(18)West African countries namely:(Benin,Burkina Faso,Cote d’Ivoire,Cameroon,Chad,Equatorial Guinea,Gambia,Ghana,Guinea,Guinea Bissau,Liberia,Mali,Mauritania,Niger,Nigeria,Senegal,Sierra,and Togo)from the year 1985 to 2020.The impact of interest rates and inflation rate on macroeconomic performance has been the subject of long examinations and many researchers have tried to prove different points of reasoning based on both empirical and theoretical standpoints: from a purely hypothetical examination of the frequencies through which this is accomplished,to empirical studies on a broad panel of countries.Since the topic is so critical to addressing the economic instability the region continues to face,these mutual debates about the impact of interest rates and inflation on economic growth as an area of investigation.Because of the significance of those variables mentioned in the topic above and this paper formulated two separate models in order to support the existing body of knowledge,firstly,the investigation of the model was based on the impact of inflation rates and economic growth in West Africa this paper consider the dependent variable as economic growth and explanatory variables included in the model are: log of gross net income,the log of inflation,the log of investment,the log of money supply,the log of population rate and the log of saving rates.The study used the following research techniques: descriptive statistics,correlation test,panel dickey unit root result,introduced two models(controlled variable using savings as controlled and the main model which account for savings)to test the robustness of the model by applying the Pedroni residual cointegration test,VAR residual serial correlation Lm test,pooled ordinary least square(POLS),fixed effects,random effects models.Additionally,the study used the Huasman test to test for endogeneity of both the controlled variables(savings)model and the robust model(inclusion of Savings)indicated that the variables in the models are all endogenous giving the response to the researcher that there’s no exogeneity variable(s)in the inflation and growth and the Granger causality results.The study also used the outcomes of the fixed effects models as the most appropriate model coefficients to calculate the long-run relationship between inflation rates and economic growth in West Africa satisfied the endogeneity condition of the models(controlled and the main models).The multiplier effect shows a positive coefficient of the log of gross net income increases the real gross domestic product by 0.013939 percent points,the log of inflation increases at 0.014604 percentage points,the log of investment also indicates a positive impact on economic growth by0.024948;the log of money supply shows a negative impact of-0.003507 on economic growth,the log of population growth rate indicates a negative influence of-0.044436 and the log of saving rates have a negative effect on economic growth at-0.0126402.Finally,the Granger causality test showed bidirectional causality between the inflation rates and economic growth.Secondly,the researcher used two models(controlled for savings and the Main model inclusive of savings)to test for the robustness of the interest rates and economic growth model.The interest rate and economic growth in West Africa this paper consider economic growth as the dependent variable and explanatory variables included in the model are: domestic credit,foreign direct investment,interest rate,domestic investments(INVs),labor,population,and savings rates.The study used the following research techniques: descriptive statistics,panel dickey,panel correlation test,Pedroni residual cointegration test,Dynamic Ordinary Least Square(DOLS)model,and Granger causality results.The study used the Dynamic Ordinary Least Square(DOLS)model coefficients to calculate the long-run multipliers effects of the two models between the interest rate and economic growth in West Africa.The multiplier effect of the mean model(inclusive of savings)shows that depreciation of the domestic credit reduces the real gross domestic product by –0.494617 percent,foreign direct investment increases at 2.013433 percent,while real interest rate indicates a negative impact on economic growth by-0.293628;domestic investments,labor,savings,and population growth rate have a positive influence on economic growth at o.023384,0.209332,1.024895 and 24.35954.To conclude,the Granger causality test showed bidirectional causality between the interest rate and economic growth.