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Is Money Supply Endogenous a Markov-Switch Exploration in the Zero Lower Bound Interest Rate in the USA

Author

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  • Buthelezi Eugene Msizi

    (University of Free State, UKZN, Bloemfontein, 9300, South Africa)

Abstract

This paper employs a Markov switch dynamic regression model to analyze money supply dynamics and interest rates in the U.S. from 2000 to 2023. The analysis identifies two distinct monetary regimes. In State 1, with lower interest rates, deficiencies in M2 variables challenge prevailing notions of endogeneity, suggesting exogeneity. State 2, reflecting higher interest rates, affirms the Federal Reserve’s exogenous control over the money supply. The inverse relationship between the money supply growth rate and interest rates supports the pivotal role of the Federal Reserve. Identifying two states contributes to theories about economic regime shifts, emphasizing the need for adaptive policymaking. Policymakers should consider state-specific strategies and incorporate money supply variables into risk management frameworks. Continuous evaluation of monetary policy effectiveness and alignment with observed impacts on money supply, stock, and interest rates is recommended for optimal economic outcomes.

Suggested Citation

  • Buthelezi Eugene Msizi, 2024. "Is Money Supply Endogenous a Markov-Switch Exploration in the Zero Lower Bound Interest Rate in the USA," Review of Economics, De Gruyter, vol. 75(3), pages 193-213.
    • Handle: RePEc:lus:reveco:v:75:y:2024:i:3:p:193-213:n:1001
    DOI: 10.1515/roe-2024-0026
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    More about this item

    Keywords

    money supply endogenous; Markov-switch; interest rate;
    All these keywords.

    JEL classification:

    • E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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