The Relationship between Monetary Policy and Economic Growth in USA

Gan, Qi Jin (2025) The Relationship between Monetary Policy and Economic Growth in USA. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

This study investigates the dynamic relationship between monetary policy and economic growth in the United States over the period 1961 to 2021. Using the Autoregressive Distributed Lag (ARDL) model, the research examines the long-run and short-run effects of key monetary policy variables—real interest rate, broad money growth, population growth, and unemployment rate—on real gross domestic product (RGDP). Unit root tests (ADF and PP) confirm mixed orders of integration among the variables, validating the use of ARDL bounds testing. The results indicate a statistically significant long-run cointegration relationship, with real interest rate and broad money growth positively influencing RGDP, while unemployment exerts a significant negative effect. Population growth, however, is found to be statistically insignificant in the long run. The error correction term is negative and significant, confirming stability, though with a slow adjustment speed of 1.12% annually. Diagnostic tests, including the Jarque-Bera, Breusch-Godfrey, and Breusch-Pagan-Godfrey tests, affirm the robustness of the model, while CUSUM and CUSUMSQ plots verify structural stability. The findings underscore the crucial role of consistent and well-calibrated monetary policy in sustaining economic growth. The study concludes with recommendations for future research, emphasizing the inclusion of fiscal policy variables, higher-frequency data, and nonlinear or causality-based modelling techniques.