Influence of key interest rates on the Eurozone GDP dynamics

The aim of the paper is to study the impact of ECB interest rate policy on gross domestic product (GDP) dynamics in Eurozone. It has been stated in the paper that the Governing Council of the European Central Bank sets the key interest rates for the euro area: the interest rate on the main refinancing operations, the rate on the deposit facility and the rate on the marginal lending facility. Correlation analysis has been exploited to analyze the association between real interest rate and gross domestic product dynamics in Eurozone. The research results reveal that in 1999-2007 and 2012-2018 real interest rate was associated with GDP growth in Eurozone positively, and the relationship was rather strong. In 2008-2011 the relationship was weak that could be explained with the world economic crisis and ECB tackling the downturn in EU economy. Granger causality test has indicated that in 1999-2007 GDP growth caused ECB interest rates dynamics, but in 2012-2018 interest rate caused GDP growth in the short-term period (1-year lag). The study shows that ECB monetary measures have played a pivotal role in supporting the economy and European Union has succeeded in using expansionary monetary policy to boost economic growth. Under quantitative easing program European Central Bank has lowered the main refinancing rate to 0%. To drive economic development European Central Bank has used long-term credits to commercial banks to maintain their lending facilities and liquidity. ECB has also been using the asset purchase program (APP) to prevent low inflation in European Union. UCB monetary policy has resulted in an increase in employment and purchasing power of the population that consequently has made positive impact on the gross domestic product dynamics in Eurozone. The findings of this research are consistent with the previous studies (Nauro F. Campos, Jarko Fidrmuc, Iikka Korhonen et al)

interest rate policy; main refinancing rate; European Central Bank; gross domestic product; correlation; causality