The Relationship between Inflation Rate, Exchange Rate and Bank Interest Rate with Economic Growth in Panel-VAR Model: Evidence from Muslim Countries

Macroeconomic conditions and the relationship of macroeconomic variables have a major impact on the economic performance of countries. Understanding these relationships helps policymakers manage macroeconomics better. Therefore, this study examines the relationship between economic growth, inflation, interest rates and exchange rates in selected Muslim countries (Bahrain, Bangladesh, Egypt, Indonesia, Iran, Malaysia, Pakistan, Kuwait, Oman and Qatar). Therefore Panel VAR method was used for this purpose. The study used panel data from selected countries over the period 2000–2016. According to the results, all variables are stationary and the model was stable. According to Granger causality results inflation rate, exchange rate and interest rate were the cause of economic growth; inflation rate, economic growth and exchange rate were the cause of economic growth rate; inflation rate, economic growth and interest rate were the cause of exchange rate and only inflation was not the cause of granger's. Exchange rates, interest rates, and inflation had positive effects on economic growth based on impulse-response functions. Exchange rates, interest rates, and economic growth had very short-term and negatively positive effects on themselves. Exchange rates, inflation and economic growth have had a negative effect on the interest rate. Finally, the effect of interest rate is unclear on exchange rate, inflation rate and economic growth had negative effect on economic growth.