Unraveling the Nexus Between Monetary Policy and Macroeconomic Performance: Evidence from the United States

Abstract

This dissertation comprises three distinct chapters, each serving as an individual publishable paper. Although these chapters share common empirical tools, the models employed in each chapter are independent of one another. As a result, each chapter is self-contained and can be comprehended separately, making its unique contribution to the subject under investigation. In the first chapter, titled “Performance Comparison of Banks Stability and Profitability Under Inflation Targeting Frameworks,” the study examines the impact of traditional inflation targeting and average inflation targeting on the stability and profitability of banks in the United States. It utilizes a sample of over 1000 banks from 2004 to 2022 and employs the fixed-effect estimator with AR (1). The findings of this study reveal that banks exhibit lower stability and reduced profitability during periods of both traditional and average inflation targeting. Furthermore, when comparing traditional inflation targeting to average inflation targeting, banks demonstrate even lower stability and experience further reductions in profitability during periods of average inflation targeting compared to periods of traditional inflation targeting. In the second chapter, titled “Analyzing the combined impact of monetary policy instruments on the profitability of banks,” this study examines the combined effect of monetary policy tools on bank profitability in the US using a sample of over 1000 banks from 2004 to 2022. Employing the two-step system generalized method of moments estimator, the results of this study show that ignoring the combination of monetary policy tools in bank profitability analysis can lead to biased and inconsistent conclusions. The study shows that the federal fund rate is negatively related to bank profit when the combination of monetary policy tools is not considered. Also, the long-term bond yield is positively related to bank profitability. Additionally, the combination of monetary policy tools is positively related to bank profitability, demonstrating that other monetary policy tools influence each monetary policy tool's impact on bank profit. In the third chapter, titled “Average inflation targeting and its effect on macroeconomic outcomes in the United States,” this paper analyzes the effect of the adoption of average inflation targeting on macroeconomic outcomes in the United States. Using the three stage least square method of estimation, this study contributes to the monetary policy literature by showing how the Federal Reserve's monetary policy has impacted economic growth and stability. In general, the study finds that the direct effects of the adoption of AIT is an increase in the percentage change in the inflation rate and interest rate. Also, the adoption of AIT has led to an increase in the percentage change in output when there is no inclusion of lagged variables. Lastly, the total effect of the implementation of AIT is an increase in both inflation rate and interest rate.