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

27 Pages Posted: 19 Jul 2012

See all articles by M. Hashem Pesaran

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

Ron Smith

Birkbeck College

Date Written: July 18, 2012

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.

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

JEL Classification: C180, C540, E650

Suggested Citation

Pesaran, M. Hashem and Smith, Ron P., Counterfactual Analysis in Macroeconometrics: An Empirical Investigation into the Effects of Quantitative Easing (July 18, 2012). CESifo Working Paper Series No. 3879, Available at SSRN: https://ssrn.com/abstract=2111934

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

Ron P. Smith

Birkbeck College ( email )

Malet Street
London WC1E 7HX
United Kingdom
+44 207 631 6413 (Phone)
+44 207 631 6416 (Fax)

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