Rethinking Global Macroeconomic Causality: A Structural VAR Model Based on U.S. Evidence

By presenting a new Structural Vector Autoregression (SVAR) Model that questions the traditional ordering of interest rates, inflation, and GDP growth, this study examines macroeconomic causality. Interest rates are frequently portrayed in traditional macroeconomic models as proactive policy instruments that affect prices and output. However, the present research highlights the reactive nature of modern monetary policy by putting forth an alternative causal structure that draws on post-2008 and post-pandemic global economic disruptions. In this structure, real and supply-side shocks drive GDP growth and inflation simultaneously, while interest rates react later. Utilizing annual data from 1961 to 2025 in the United States, the study uses rigorous time-series techniques such as forecast error variance decomposition (FEVD), impulse response functions (IRFs), VAR diagnostics, and Augmented Dickey-Fuller (ADF) tests. The findings show that inflation dominates monetary policy response, GDP growth shows considerable self-dependence, and interest rates have a limited and delayed short-term impact on macroeconomic variables. While the empirical foundation is U.S.-specific, the findings have significant global implications. In an era of inflation persistence, geopolitical shocks, and central banks operating near the lower bound, this revised SVAR Model offers a globally adaptable approach for understanding dynamic macroeconomic interactions. The study contributes to the evolving literature on monetary transmission by reordering causality in a way that better reflects contemporary macroeconomic realities.