Modeling for the Relationship between Monetary Policy and GDP in the USA Using Statistical Methods

Andre Amaral, Taysir E. Dyhoum (), Hussein A. Abdou and Hassan M. Aljohani ()
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Andre Amaral: School of Computing, Faculty of Science, Technology, Engineering and Mathematics, Arden University, Coventry CV3 4FJ, UK
Taysir E. Dyhoum: School of Computing, Faculty of Science, Technology, Engineering and Mathematics, Arden University, Coventry CV3 4FJ, UK
Hussein A. Abdou: School of Business, Faculty of Business & Justice, University of Central Lancashire, Preston PR1 2HE, UK
Hassan M. Aljohani: Department of Mathematics & Statistics, College of Science, Taif University, P.O. Box 11099, Taif 21944, Saudi Arabia

Mathematics, 2022, vol. 10, issue 21, 1-20

Abstract: The Federal Reserve has played an arguably important role in financial crises in the United States since its creation in 1913 through monetary policy tools. Thus, this paper aims to analyze the impact of monetary policy on the United States’ economic growth in the short and long run, measured by Gross Domestic Product (GDP). The Vector Autoregressive (VAR) method explores the relationship among the variables, and the Granger causality test assesses the predictability of the variables. Moreover, the Impulse Response Function (IRF) examines the behavior of one variable after a change in another, utilizing the time-series dataset from the first quarter of 1959 to the second quarter of 2022. This work demonstrates that expansionary monetary policy does have a positive impact on economic growth in the short term though it does not last long. However, in the long term, inflation, measured by the Consumer Price Index (CPI), is affected by expansionary monetary policy. Therefore, if the Federal Reserve wants to cease the expansionary monetary policy in the short run, this should be done appropriately, with the fiscal surplus, to preserve its credibility and trust in the US dollar as a global store of value asset. Also, the paper’s findings suggest that continuous expansion of the Money Supply will lead to a long-term inflationary problem. The purpose of this research is to bring the spotlight to the side effects of expansionary monetary policy on the US economy, but also allow other researchers to test this model in different economies with different dynamics.

Keywords: E52—monetary policy; E58—central banks and their policies; E43—interest rates: determination; term structure; and effects; E44—financial markets and the macroeconomy; E47—forecasting and simulation: models and applications; C32—time-series models; C53—forecasting and prediction methods; C54—quantitative policy modeling; C55—large data sets: modeling and analysis (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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