Adoption of multivariate copulae in prognostication of economic growth by means of interest rate

Saputra, Dewi Tanasia (2014) Adoption of multivariate copulae in prognostication of economic growth by means of interest rate. Bachelor thesis, Universitas Pelita Harapan.

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Abstract

Inflation, at a healthy rate, is a sign of growing economy. Nonetheless, when inflation rate grows uncontrollably, it will negatively influence economic growth. Many tackle this problem by increasing interest rate to help protecting the value of money which are detained by inflation. There are few, however, who study the effects of interest rate in economic growth. The main purposes of this paper are to find how the change of interest rate affects economic growth and to use the relationship in prognostication of economic growth. By using expenditure model, a linear relationship between economic growth and interest rate is developed. The result is then used for prediction by normal copula and Vine Archimedean copula. It is shown that increasing interest rate to tackle inflation is a poor solution. Whereas implementation of copula in predicting economic growth yields an accurate result, with not more than 0.5% difference.

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