Does M1 Money Supply Affect US Exports?

Abstract

M1 money is defined by the Federal Reserve as money in circulation as well as money in demand deposit accounts such as a checking account. The Fed, as it is commonly referred to as, uses this figure to target interest rates in the economy. This is done to either stimulate the economy to provide growth, or to slow economic growth to curb inflation. By manipulating interest rates in the economy, however, the Fed can also encourage or deter foreign investment, as investors always seek the highest return. If many investors wish to invest in the United States this strengthens the U.S. dollar, effectively raising the price of exported goods. Due to the inverse relationship between price and quantity demanded, higher prices should lead to lower quantities of American goods demanded and vice versa. Depending on the elasticity of this demand, an increase in M1 money supply could either increase or decrease U.S. exports. In this study, regression analysis which of these is in fact the case.