Do the interest rates really relate to economic growth? The case of Greece

Abstract

We empirically investigate the relationship between the economic growth and various monetary variables, focusing on the Greek economy. Using monthly data on the Industrial Production Index (IPI) as a proxy for economic growth, along with 10-year bond yields, 10-year bond spreads, and 3-month and 12-month interest rates, we aim to incorporate them into a multivariate GARCH-DCC econometric framework. Specifically, we examine the DCCs’ behavior during the memoranda period, pandemic period and a stable period. Our main result is that in almost all cases, the economic growth is not affected by changes in interest rates, the spread or the bond yield. Only during the pandemic period seems to be a negative relationship between the spread and bond in relation to IPI, while the 3-months rate and IPI follow a different pattern. This adds to recent doubts about the prevailing conduct of monetary policy and common theoretical models (e.g., lowering interest rates may have no effect, when trying to stimulate the economy). These results provide crucial implications for policymakers and highlight the need for some form of policy coordination among central banks.