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

Author

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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
    School of the Natural Sciences, Faculty of Science and Technology, University of Central Lancashire, Preston PR1 2HE, UK
    Department of Mathematics & Statistics, Faculty of Science, Misurata University, Misurata 21851, Libya)

  • Hussein A. Abdou

    (School of Business, Faculty of Business & Justice, University of Central Lancashire, Preston PR1 2HE, UK
    Department of Management, Faculty of Commerce, Mansoura University, Mansoura 35511, Egypt)

  • Hassan M. Aljohani

    (Department of Mathematics & Statistics, College of Science, Taif University, P.O. Box 11099, Taif 21944, Saudi Arabia)

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.

Suggested Citation

  • Andre Amaral & Taysir E. Dyhoum & Hussein A. Abdou & Hassan M. Aljohani, 2022. "Modeling for the Relationship between Monetary Policy and GDP in the USA Using Statistical Methods," Mathematics, MDPI, vol. 10(21), pages 1-20, November.
    • Handle: RePEc:gam:jmathe:v:10:y:2022:i:21:p:4137-:d:964569
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    References listed on IDEAS

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