The Dynamic Relationship between Innovation Index and Macroeconomic Instruments in the United States

ABSTRACT : Innovation growth is a fundamental instrument that drives a country’s economic growth, andeconomic growth is best quantified using important macroeconomic measures that reflect the economic growthand development of the country. The sole objective of this research study is to investigate the dynamic linkbetween the innovation index and macroeconomic instruments in the United States. Secondary data wasextracted from World Bank data publications (data.worldbank.org) and theglobaleconomy.com for the periodunder consideration, 1991 to 2021, for macroeconomic instruments and innovation index respectively in theUnited States. The unit root test was employed which indicates that the innovation and macroeconomicvariables are stationary after the first difference which suggests that further econometric models can be appliedto constitute the dynamic association. The dynamic relationship is explored using different econometric modelssuch as the regression model which indicate that there is a significant linear relationship between innovation andmacroeconomic instruments, vector autoregression (Var model) shows that there is a short-run relationshipbetween innovation and macroeconomic instruments while Johansen cointegration shows that there is a long-runrelationship between them and impulse response function reveals that there is a positive response of innovationindex to GDP and GDP growth shocks which indicate that there is a positive relationship between the USinnovation index and macroeconomic tools. This suggests that innovation growth in the united states contributedimmensely to her growth and development. Consequently, there is a need for the US government to continuallyinject sustainable policy that is capable of accommodating global economic crisis into the system that willpromote innovation growth for sustainable economic growth and development.

Keywords: Innovation Index, Macroeconomic instruments, Multiple regression model. Unit root test, Var model,Johansen cointegration, Impulse response