Examining the Dynamic Relationship between GDP, CPI and M2 in the United States Using VAR Modeling

The article examines the dynamics between GDP, CPI and M2 in the U.S. A vector autoregression (VAR) model is used to analyze the relationship between these variables. It is found that positive shocks to GDP have a short-run negative effect on M2, but this effect diminishes and tends to zero in the long-run. The Fisher equation and the quantity theory of money, which postulate that economic output and money supply eventually rebalance, can be used to explain this occurrence. In the short term, an increase in output suppresses the money supply. Furthermore, it was shown that the CPI’s fluctuations had little effect on GDP. This finding is in line with neoclassical economic theory, which maintains that variations in the level of prices have little bearing on actual economic output. On the contrary, an increase in M2 has a positive cumulative effect on both CPI and GDP, which suggests that an increase in the money supply leads to an increase in the price level and economic output, which is consistent with Keynesian economic theory. Overall, this paper analyzes the dynamic relationship between key variables in the U.S. economy through a VAR model, providing important insights into monetary policy and economic fluctuations, which are important for understanding and predicting the direction of the U.S. economy, as well as for formulating effective macroeconomic policies.