Lower interest rates stimulate the economy by reducing unemployment

Yiyao Zhou, “Monetary Policy and Unemployment—A Study on the Relationship Exists in the United States,” Open Journal of Social Sciences, Vol. 9, No. 4, April 2021, https://www.scirp.org/journal/paperinformation.aspx?paperid=108692

5. Conclusion

This paper has examined variables of monetary policies and unemployment, which are Federal interest rate, Inflation gap which used indictors of CPI deflator, the unemployment rate gap that utilized the real unemployment rate disclosed by the United States Social Security Administration, as well as production gap where the real quarterly Gross Domestic Product in Billion US dollars is used, respectively. In conclusion, after reviewing the results that generated from the data that collected, this present paper is able to find that there is a significantly positive link between the unemployment gap degree and Federal Interest Rate in both ex-crisis and post-crisis periods for the US. In other words, a higher Federal Interest rate could be implemented if the unemployment rate is higher, and hence slow down the domestic economy, which implies the authorities to implement an easy monetary policy to decrease the Fed rate. Another finding is that the inflation rate Gap could affect the Federal Interest Rate in a strongly positive way before the financial crisis but drop dramatically after the financial crisis. The production gap has a relatively tiny connection with the federal Interest rate ex-crisis and decrease to an even smaller figure post-crisis. The significance of the link between unemployment rate and the Fed Interest Rate has not decreased after the 2008 global financial shock, which could be indicating that the unemployment rate could also reflect the downturn of the domestic economy in the United States even after the financial crisis. As a result, an implementation of an easy monetary policy could strongly stimulate the recession of the economy and make positive impacts on the domestic economy of the US. In order to receive a broader and deeper understanding between monetary policies and unemployment, future studies are recommended to carry out a cross country research and make comparisons with the differences from each country. Countries could be chosen as specific groups, for example, a group of developed countries or a group of emerging countries. Although there are many sample countries, it could be hard to find data in shorter intervals, i.e., monthly data or quarterly data, especially in emerging countries.