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


  • Pesaran, M. Hashem

    () (University of Cambridge)

  • Smith, Ron P.

    () (Birkbeck College, University of London)


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.

Suggested Citation

  • Pesaran, M. Hashem & Smith, Ron P., 2012. "Counterfactual Analysis in Macroeconometrics: An Empirical Investigation into the Effects of Quantitative Easing," IZA Discussion Papers 6618, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp6618

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    References listed on IDEAS

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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. What are the effects of Quantitative Easing
      by Peter in Macroeconomic Analysis on 2013-08-22 10:55:34
    2. Liam Plunkett & the tragedy of social science
      by chris dillow in Stumbling and Mumbling on 2014-06-25 17:40:57


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    More about this item


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

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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