Analyzing the Dynamic Impact of Monetary Policy Shocks on Inflation and Unemployment

Analyzing the Dynamic Impact of Monetary Policy Shocks on Inflation and Unemployment

Abstract

This paper investigates the dynamic impact of monetary-policy shocks on inflation and unemployment using a Structural Vector Autoregression framework. Using high-frequency data from the Federal Reserve Economic Data database, it analyzes the transmission mechanism of the Federal Funds Rate. The methodology includes Augmented Dickey-Fuller tests for stationarity, lag selection through the Akaike Information Criterion, and estimation of Impulse Response Functions. The results quantify how a contractionary monetary-policy shock produces a temporary increase in unemployment and a subsequent decline in inflation, providing empirical evidence of the trade-offs faced by central banks. The model’s stability and forecast-error variance decomposition further validate the significance of interest-rate shocks in explaining macroeconomic fluctuations.

Authors

Anamika Singh, Nitesh Kumar, Piyush Raj, Prince Kumar, Priti Singh

Institution

Noida Institute of Engineering & Technology (MCA Institute), Greater Noida, India

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