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Quantitative easing, global economic crisis and market response

Listed author(s):
  • Hausken, Kjell



  • Ncube, Mthuli

We develop a game theoretic model for the central banks profit and the markets profit dependent on quantitative easing (QE) or no quantitative easing (no QE), where the market responds by lowering interest rates, keeping interest rates unchanged, or raising interest rates. The model is compared with empirical data. We classify 69 QE events and 69 no QE counterfactuals for four central banks, i.e. 17 events for the Federal Reserve, 9 events for Bank of England, 32 events for Bank of Japan, and 11 events for the European Central Bank. The market response to the BoJ and ECB QE is almost exclusively to keep interest rates unchanged. Although this response is most common to the Federal Reserve QE (9 events), the market frequently responds as the Federal Reserve prefers, by lowering interest rates (7 events). For BoE the market response is evenly split across the three outcomes.

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Paper provided by University of Stavanger in its series UiS Working Papers in Economics and Finance with number 2013/4.

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Length: 19 pages
Date of creation: 13 Jun 2013
Handle: RePEc:hhs:stavef:2013_004
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University of Stavanger, NO-4036 Stavanger, Norway

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  1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  2. Baumeister, Christiane & Benati, Luca, 2010. "Unconventional monetary policy and the great recession - Estimating the impact of a compression in the yield spread at the zero lower bound," Working Paper Series 1258, European Central Bank.
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