The effect of monetary and fiscal policies on the short and long-term growth of SME's in the United States

Abstract

This thesis examines the short-run and long-run effects of fiscal and monetary policies on the growth of Small and Medium Enterprises (SMEs) in the United States over the period 2015–2024. Using monthly time-series data and the Autoregressive Distributed Lag (ARDL) bounds-testing models, SME growth is measured by the percentage month-on-month change in total high-propensity business applications obtained from FRED.

The results reveal a clear policy hierarchy. In the long-run, only fiscal policy matters: a sustained 1% increase in real government expenditure raises the SME growth rate by 47.73 percentage points (p = 0.039), whereas a 1% increase in government revenue reduces long-run SME growth by 17.63 percentage points (p = 0.016). Monetary policy instruments (real interest rates, M2 money supply, and total exports) exhibit no significant long-run impact. In the short run, monetary policy effects are significant but often counterintuitive: higher real interest rates temporarily boost SME growth (+12.38 percentage points per 1 percentage-point increase, p = 0.034), while rapid money-supply expansion strongly depresses it (–83.502 percentage points per 1% increase, p = 0.026). Higher exports are associated with lower long-run SME growth (–31.74 percentage points per 1% increase, p = 0.031). Vector Error Correction Model forecasts confirm that the fastest and strongest recovery of SME growth toward long-run equilibrium occurs under deficit-financed fiscal expansion (higher expenditure combined with restrained revenue growth). The findings imply that sustainable US SME growth requires prioritizing fiscal stimulus through increased government spending, financed by borrowing rather than immediate taxation, while exercising caution with aggressive monetary easing and export-led strategies.