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To understand how changing interest rates impacts GDP, you run a regression of GDP on the Fed Funds Rate without making any changes to the
To understand how changing interest rates impacts GDP, you run a regression of GDP on the Fed Funds Rate without making any changes to the data.Will this regression tell you the causal impact of changes in interest rates or output? Why? What are some possible biases in this regression? If the Federal Reserve always raises interest rates when GDP is increasing, is this a positive, negative or no bias to the regression? What does the IS-MP and AD-IA model predict will happen when the central bank adopts an expansionary monetary policy?
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