Lenny D. answered • 07/09/19
Former professor of economics at Tufts University
Probably the best way is by way of example. Simple Macro models suggest suggest that monetary policy can affect real activity as investment spending is linked to interest rates. Typically, the Fed may ease pushing down interest rates this while eventually impact interest sensitive spending like durable good, Housing and business fixed investment. We look to test whether changes in Interest rates precede changes in spending. If we reject the null hypothesis they do not we say that Changes in interest rates are causally prior to changes in spending. Or they "granger cause" changes in investment. This is a necessary condition but not a sufficient. That is, if there is a link we must see this. However, because we see this does not mean there is a link.
