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

Andre Amaral; Taysir E. Dyhoum; Hussein A. Abdou; Hassan M. Alijohani

doi:10.3390/math10214137

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

Andre Amaral, Taysir E. Dyhoum^*, Hussein A. Abdou, Hassan M. Alijohani^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

3 Citations (Scopus)

19 Downloads (Pure)

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.

Original language	English
Article number	4137
Number of pages	20
Journal	Mathematics
Volume	10
Issue number	21
DOIs	https://doi.org/10.3390/math10214137
Publication status	Published - 5 Nov 2022
Externally published	Yes

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
C32—time-series models
C53—forecasting and prediction methods
C54—quantitative policy modeling
C55—large data sets: modeling and analysis

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mathematics-10-04137-v2Final published version, 2.2 MBLicence: CC BY

https://clok.uclan.ac.uk/44760/Licence: CC BY

Cite this

@article{f7814a3b8852413cae5d99ed87b1065d,

title = "Modeling for the Relationship between Monetary Policy and GDP in the USA Using Statistical Methods",

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{\textquoteright} 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{\textquoteright}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, C32—time-series models, C53—forecasting and prediction methods, C54—quantitative policy modeling, C55—large data sets: modeling and analysis",

author = "Andre Amaral and Dyhoum, {Taysir E.} and Abdou, {Hussein A.} and Alijohani, {Hassan M.}",

note = "Funding information: Funding: This study was funded by Taif University Researchers Supporting Project number (TURSP2020/279), Taif University, Taif, Saudi Arabia. Also, the APC was funded by the same sponsor.",

year = "2022",

month = nov,

day = "5",

doi = "10.3390/math10214137",

language = "English",

volume = "10",

journal = "Mathematics",

issn = "2227-7390",

publisher = "MDPI AG",

number = "21",

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T1 - Modeling for the Relationship between Monetary Policy and GDP in the USA Using Statistical Methods

AU - Amaral, Andre

AU - Dyhoum, Taysir E.

AU - Abdou, Hussein A.

AU - Alijohani, Hassan M.

N1 - Funding information: Funding: This study was funded by Taif University Researchers Supporting Project number (TURSP2020/279), Taif University, Taif, Saudi Arabia. Also, the APC was funded by the same sponsor.

PY - 2022/11/5

Y1 - 2022/11/5

N2 - 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.

AB - 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.

KW - E52—monetary policy

KW - E58—central banks and their policies

KW - E43—interest rates: determination; term structure; and effects

KW - E44—financial markets and the macroeconomy

KW - 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

KW - C32—time-series models

KW - C53—forecasting and prediction methods

KW - C54—quantitative policy modeling

KW - C55—large data sets: modeling and analysis

U2 - 10.3390/math10214137

DO - 10.3390/math10214137

M3 - Article

SN - 2227-7390

VL - 10

JO - Mathematics

JF - Mathematics

IS - 21

M1 - 4137

ER -