Interconnection of Interest Rate, Price Level, Money Supply and Real GDP: The Case of the Czech Republic

The main aim of this paper is to investigate relationships between selected macroeconomic variables – interest rate, price level, money supply and real GDP – in the Czech Republic in order to find out definite implications of its interactions and give recommendations to macroeconomic policy authorities. Implemented vector autoregression approach suggests that three pairs of Granger causality exist, in particular past price level change Granger-causes interest rate change, past real GDP Granger-causes interest rate change and finally past real GDP change Granger-causes price level change. The model allows forecasting the direction of change in case of variables interest rate and real GDP with a high success rate.