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

Mohammad Pesaran and Ronald Smith

No 1406, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: The policy innovations that followed the recent Great Recession, such as unconventional monetary policies, prompted renewed interest in the question of how to measure the effectiveness of such policy interventions. To test policy effectiveness requires a model to construct a counterfactual for the outcome variable in the absence of the policy intervention and a way to determine whether the differences between the realised outcome and the model-based counter-factual outcomes are larger than what could have occurred by chance in the absence of policy intervention. Pesaran & Smith propose tests of policy ineffectiveness in the context of macroeconometric rational expectations dynamic stochastic general equilibrium models. When we are certain of the specification, estimation of the complete system imposing all the cross-equation restrictions implied by the full structural model is more efficient. But if the full model is misspecified, one may obtain more reliable estimates of the counterfactual outcomes from a parsimonious reduced form policy response equation, which conditions on lagged values, and on the policy measures and variables known to be invariant to the policy intervention. We propose policy ineffectiveness tests based on such reduced forms and illustrate the tests with an application to the unconventional monetary policy known as quantitative easing (QE) adopted in the UK.

Keywords: Counterfactuals; policy analysis; policy ineffectiveness test; macroeconomics; quantitative easing (QE). (search for similar items in EconPapers)
JEL-codes: C18 C54 E65 (search for similar items in EconPapers)
Date: 2014-06
New Economics Papers: this item is included in nep-ecm, nep-mac and nep-mon
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Citations: View citations in EconPapers (7)

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https://eprints.bbk.ac.uk/id/eprint/15285 First version, 2014 (application/pdf)

Related works:
Journal Article: Counterfactual analysis in macroeconometrics: An empirical investigation into the effects of quantitative easing (2016) Downloads
Working Paper: Counterfactual Analysis in Macroeconometrics: An Empirical Investigation into the Effects of Quantitative Easing (2012) Downloads
Working Paper: Counterfactual Analysis in Macroeconometrics: An Empirical Investigation into the Effects of Quantitative Easing (2012) Downloads
Working Paper: Counterfactual Analysis in Macroeconometrics: An Empirical Investigation into the Effects of Quantitative Easing (2012) Downloads
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