The aim of our study is to investigate the mutual effects of traditional and especially non-traditional monetary policy tools, such as balance sheet expansions, on inflation, unemployment, and industrial production between January 2008 and September 2024, in order to assist central banks in shaping and implementing monetary policies more consciously and effectively. Such analytical approaches can help policymakers evaluate economic outcomes and optimise monetary policy strategies.

Many studies have been conducted on the uncertainty and variability of inflation in the literature. Stock (2007) noted in his study that due to advancements in multivariate models, predicting inflation with a particular model has become much more challenging. It is observed that single-variable models using the widely used Phillips Curve are insufficient in forecasting inflation, particularly in the literature.

In this study, the effects of the industrial production index and the size of the Fed’s balance sheet, along with the unemployment rate, which is part of the Phillips Curve, on inflation will be examined. 

To determine the suitable analysis method for our variables, unit root tests will be conducted initially. If all variables are found to be stationary at the I(1) level, the presence of co-integration will be tested. If co-integration exists, the causality relationship between the variables will be examined using short- and long-term VEC Granger tests, and the analyses will be interpreted accordingly

According to the results of the DOLS test, it has been determined that the increase in the Fed’s balance sheet has significant and positive effects on inflation. This result confirms the general expectation that an increase in the balance sheet would increase inflation. Additionally, according to the DOLS test results, the increase in the industrial production index and changes in unemployment also have statistically significant and positive effects on inflation.

In the short term, changes in the Fed’s balance sheet are found to be the Granger cause of inflation. Another notable aspect of these tests is the significant Granger causality effect of Federal Reserve System’s monetary policies on the Industrial Production Index (IPE) used as data to gauge the intensity of monetary policies. Additionally, the Fed is found to be the Granger cause of the IPE. Both the Fed and unemployment (UNE) have been identified as Granger causal factors of the IPE. These results demonstrate the significance of short-term monetary policies in determining the impact of changes in the Fed’s balance sheet on inflation.

In our study, which uses data from January 2008 to August 2024, we conducted co-integration tests for the relevant variables (Table 7) and analysed causality relationships among them. According to FMOLS and DOLS analyses (Table 9), changes in the Federal Reserve’s (FED) balance sheet have a significant and positive impact on inflation. The test results indicate a long-term relationship among the variables (Table 10). Based on the Granger Causality tests, changes in the size of the FED’s assets cause one-directional changes in inflation (Table 10). In summary, increases in the FED’s balance sheet appear to be a driver of inflation, a relationship that is also statistically confirmed. 

This study aligns with the findings of Mishkin (2009), Swanson (2018), Driscoll (2022), and Romer and Romer (2023). Increases in the FED’s assets, both in the short and long term, contribute to inflation alongside the money supply, while abnormally low policy interest rates intensify inflationary pressures. Our study reveals that asset purchases and balance sheet expansions, as monetary policy tools, have significant inflationary effects. Regarding the long-term causality tests, all variables are found to be the long-term Granger cause of both Fed assets (FEDA) and unemployment (UNE).

This study examines the effects of Federal Reserve’s monetary policies on inflation, particularly analysing the impact of balance sheet expansion post-2008 and during the COVID-19 era. According to DOLS analyses, changes in the Fed’s balance sheet have significant effects on inflation. Granger Causality tests suggest that increases in Federal Reserve System’s assets unilaterally lead to changes in inflation. Furthermore, the study explores the long-term effects of inflation, monetary policies, and industrial index changes on unemployment, emphasising the need for caution in inflation and monetary policies for countries aiming to increase employment. Lastly, it suggests the usefulness of investigating the effects of balance sheet size on inflation in developing countries in future research, while also considering scenarios where national currencies are not reserve currencies.