Is Money Supply Endogenous a Markov-Switch Exploration in the Zero Lower Bound Interest Rate in the USA

Abstract This paper employs a Markov switch dynamic regression model to analyze money supply dynamics and interest rates in the U.S. from 2000 to 2023. The analysis identifies two distinct monetary regimes. In State 1, with lower interest rates, deficiencies in M2 variables challenge prevailing notions of endogeneity, suggesting exogeneity. State 2, reflecting higher interest rates, affirms the Federal Reserve’s exogenous control over the money supply. The inverse relationship between the money supply growth rate and interest rates supports the pivotal role of the Federal Reserve. Identifying two states contributes to theories about economic regime shifts, emphasizing the need for adaptive policymaking. Policymakers should consider state-specific strategies and incorporate money supply variables into risk management frameworks. Continuous evaluation of monetary policy effectiveness and alignment with observed impacts on money supply, stock, and interest rates is recommended for optimal economic outcomes.