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Counterfactual Analysis in Macroeconometrics: An Empirical Investigation into the Effects of Quantitative Easing

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  • M. Hashem Pesaran
  • Ron P. Smith

Abstract

This paper is concerned with ex ante and ex post counterfactual analyses in the case of macroeconometric applications where a single unit is observed before and after a given policy intervention. It distinguishes between cases where the policy change affects the model’s parameters and where it does not. It is argued that for ex post policy evaluation it is important that outcomes are conditioned on ex post realized variables that are invariant to the policy change but nevertheless influence the outcomes. The effects of the control variables that are determined endogenously with the policy outcomes can be solved out for the policy evaluation exercise. An ex post policy ineffectiveness test statistic is proposed. The analysis is applied to the evaluation of the effects of the quantitative easing (QE) in the UK after March 2009. It is estimated that a 100 basis points reduction in the spread due to QE has an impact effect on output growth of about one percentage point, but the policy impact is very quickly reversed with no statistically significant effects remaining within 9-12 months of the policy intervention.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3879.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3879

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Keywords: counterfactuals; policy evaluation; macroeconomics; quantitative easing (QE); UK economic policy;

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References

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  1. Domenico Giannone & Michèle Lenza & Huw Pill & Lucrezia Reichlin, 2010. "Non‐Standard Monetary Policy Measures," Working Papers ECARES, ULB -- Universite Libre de Bruxelles ECARES 2010-040, ULB -- Universite Libre de Bruxelles.
  2. Wooldridge, Jeffrey M. & Imbens, Guido, 2009. "Recent Developments in the Econometrics of Program Evaluation," Scholarly Articles 3043416, Harvard University Department of Economics.
  3. Guido W. Imbens, 2009. "Better LATE Than Nothing: Some Comments on Deaton (2009) and Heckman and Urzua (2009)," NBER Working Papers 14896, National Bureau of Economic Research, Inc.
  4. Charles A. E. Goodhart & Jonathan P. Ashworth, 2012. "QE: a successful start may be running into diminishing returns," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 28(4), pages 640-670, WINTER.
  5. Christiane Baumeister & Luca Benati, 2012. "Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound," Working Papers, Bank of Canada 12-21, Bank of Canada.
  6. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2005. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," CESifo Working Paper Series 1425, CESifo Group Munich.
  7. M. Hashem Pesaran & L. Vanessa Smith & Ron P. Smith, 2007. "What if the UK or Sweden had joined the euro in 1999? An empirical evaluation using a Global VAR," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(1), pages 55-87.
  8. Pesaran, M. Hashem & Pick, Andreas & Pranovich, Mikhail, 2013. "Optimal forecasts in the presence of structural breaks," Journal of Econometrics, Elsevier, Elsevier, vol. 177(2), pages 134-152.
  9. Joyce, Michael, 2012. "Quantitative easing and other unconventional monetary policies: Bank of England conference summary," Bank of England Quarterly Bulletin, Bank of England, Bank of England, vol. 52(1), pages 48-56.
  10. James J. Heckman, 2010. "Building Bridges between Structural and Program Evaluation Approaches to Evaluating Policy," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 356-98, June.
  11. James J. Heckman, 2008. "Econometric Causality," Working Papers, Geary Institute, University College Dublin 200826, Geary Institute, University College Dublin.
  12. Athanasios Orphanides & John Williams, 2011. "Monetary Policy Mistakes and the Evolution of Inflation Expectations," NBER Working Papers 17080, National Bureau of Economic Research, Inc.
  13. George Kapetanios & Haroon Mumtaz & Ibrahim Stevens & Konstantinos Theodoridis, 2012. "Assessing the Economy‐wide Effects of Quantitative Easing," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 122(564), pages F316-F347, November.
  14. Jack Meaning & Feng Zhu, 2011. "The impact of recent central bank asset purchase programmes," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, December.
  15. Claudio Borio & Piti Disyatat, 2010. "Unconventional Monetary Policies: An Appraisal," Manchester School, University of Manchester, vol. 78(s1), pages 53-89, 09.
  16. Joyce, Michael & Lasaosa, Ana & Stevens , Ibrahim & Tong, Matthew, 2010. "The financial market impact of quantitative easing," Bank of England working papers, Bank of England 393, Bank of England.
  17. Gabriel Fagan & James R. Lothian & Paul D. Mcnelis, 2013. "Was The Gold Standard Really Destabilizing?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(2), pages 231-249, 03.
  18. Alberto Abadie & Javier Gardeazabal, 2003. "The Economic Costs of Conflict: A Case Study of the Basque Country," American Economic Review, American Economic Association, American Economic Association, vol. 93(1), pages 113-132, March.
  19. Joshua D. Angrist & Òscar Jordà & Guido M. Kuersteiner, 2013. "Semiparametric estimates of monetary policy effects: string theory revisited," Working Paper Series, Federal Reserve Bank of San Francisco 2013-24, Federal Reserve Bank of San Francisco.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. What are the effects of Quantitative Easing
    by Peter in Macroeconomic Analysis on 2013-08-22 05:55:34
  2. Liam Plunkett & the tragedy of social science
    by chris dillow in Stumbling and Mumbling on 2014-06-25 12:40:57
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Cited by:
  1. Vincenzo Bove & Roberto Nisticò, 2014. "Coups d'état and Defense Spending: A Counterfactual Analysis," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 366, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  2. Adrián Armas & Paul Castillo & Marco Vega, 2014. "Inflation Targeting and Quantitative Tightening: Effects of Reserve Requirements in Peru," IDB Publications 84714, Inter-American Development Bank.
  3. M. Hashem Pesaran & Ron P. Smith, 2013. "Signs of Impact Effects in Time Series Regression Models," CESifo Working Paper Series 4433, CESifo Group Munich.
  4. Renzo Rossini & Adrián Armas & Zenón Quispe, 2014. "Global policy spillovers and Peru’s monetary policy: inflation targeting, foreign exchange intervention and reserve requirements," BIS Papers chapters, in: Bank for International Settlements (ed.), The transmission of unconventional monetary policy to the emerging markets, volume 78, pages 241-264 Bank for International Settlements.
  5. Salvatore Morelli, 2014. "Banking Crises in the US: the Response of Top Income Shares in a Historical Perspective," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 359, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  6. Milcheva, Stanimira, 2013. "Cross-country effects of regulatory capital arbitrage," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(12), pages 5329-5345.
  7. Joyce, Michael & Spaltro, Marco, 2014. "Quantitative easing and bank lending: a panel data approach," Bank of England working papers, Bank of England 504, Bank of England.
  8. Li MA & Zhongyuan DUAN & Huadan YU, 2013. "The Transmission Mechanism and Effectiveness of the Fed's Operation Twist," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 164-181, October.

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