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

  • M. Hashem Pesaran
  • Ron P. Smith

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

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Date of creation: 2012
Date of revision:
Handle: RePEc:ces:ceswps:_3879
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  1. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2004. "Exploring the International Linkages of the Euro Area: A Global VAR Analysis," IEPR Working Papers 04.6, Institute of Economic Policy Research (IEPR).
  2. 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," Staff Working Papers 12-21, Bank of Canada.
  3. James J. Heckman, 2008. "Econometric Causality," NBER Working Papers 13934, National Bureau of Economic Research, Inc.
  4. Pesaran, M. Hashem & Pick, Andreas & Pranovich, Mikhail, 2013. "Optimal forecasts in the presence of structural breaks," Journal of Econometrics, Elsevier, vol. 177(2), pages 134-152.
  5. Joyce, Michael & Lasaosa, Ana & Stevens , Ibrahim & Tong, Matthew, 2010. "The financial market impact of quantitative easing," Bank of England working papers 393, Bank of England.
  6. Athanasios Orphanides & John C. Williams, 2012. "Monetary Policy Mistakes and the Evolution of Inflation Expectations," NBER Chapters, in: The Great Inflation: The Rebirth of Modern Central Banking, pages 255-288 National Bureau of Economic Research, Inc.
  7. Jack Meaning & Feng Zhu, 2011. "The impact of recent central bank asset purchase programmes," BIS Quarterly Review, Bank for International Settlements, December.
  8. 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, vol. 28(4), pages 640-670, WINTER.
  9. Giannone, Domenico & Lenza, Michele & Pill, Huw & Reichlin, Lucrezia, 2011. "Non-standard monetary policy measures and monetary developments," Working Paper Series 1290, European Central Bank.
  10. Michael Joyce & David Miles & Andrew Scott & Dimitri Vayanos, 2012. "Quantitative Easing and Unconventional Monetary Policy – an Introduction," Economic Journal, Royal Economic Society, vol. 122(564), pages F271-F288, November.
  11. Wooldridge, Jeffrey M. & Imbens, Guido, 2009. "Recent Developments in the Econometrics of Program Evaluation," Scholarly Articles 3043416, Harvard University Department of Economics.
  12. Alberto Abadie & Javier Gardeazabal, 2003. "The Economic Costs of Conflict: A Case Study of the Basque Country," American Economic Review, American Economic Association, vol. 93(1), pages 113-132, March.
  13. Kapetanios, George & Mumtaz, Haroon & Stevens, Ibrahim & Theodoridis, Konstantinos, 2012. "Assessing the economy-wide effects of quantitative easing," Bank of England working papers 443, Bank of England.
  14. 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.
  15. Claudio Borio & Piti Disyatat, 2010. "Unconventional Monetary Policies: An Appraisal," Manchester School, University of Manchester, vol. 78(s1), pages 53-89, 09.
  16. Guido W. Imbens, 2010. "Better LATE Than Nothing: Some Comments on Deaton (2009) and Heckman and Urzua (2009)," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 399-423, June.
  17. 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.
  18. 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., vol. 12(1), pages 55-87.
  19. Joshua D. Angrist & Òscar Jordà & Guido M. Kuersteiner, 2013. "Semiparametric estimates of monetary policy effects: string theory revisited," Working Paper Series 2013-24, Federal Reserve Bank of San Francisco.
  20. Joyce, Michael, 2012. "Quantitative easing and other unconventional monetary policies: Bank of England conference summary," Bank of England Quarterly Bulletin, Bank of England, vol. 52(1), pages 48-56.
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