An evaluation of quantitative easing effectiveness based on out-of-sample forecasts

Dimitris G. Kirikos; Dimitris G. Kirikos

doi:10.3934/NAR.2022021

National Accounting Review

2022, Volume 4, Issue 4: 378-389. doi: 10.3934/NAR.2022021

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Research article

An evaluation of quantitative easing effectiveness based on out-of-sample forecasts

Dimitris G. Kirikos ^{1,2
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1.
Department of Accounting and Finance, Hellenic Mediterranean University, 71410 Heraklion, Greece
2.
Hellenic Open University, Patras, Greece

Received: 23 August 2022 Revised: 17 October 2022 Accepted: 27 October 2022 Published: 04 November 2022
JEL Codes: E44, E47, E58

A line of defense of quantitative easing (QE) policies has been developed around empirical evidence that time series models do not predict long-term asset prices and yields as well as naive random walk forecasts, implying that predictions of price reversals cannot be profitable and, therefore, that QE effects are not reversed. However, in this work we present evidence that for the Eurozone, Sweden, and the UK, which have pursued QE interventions, a random walk does not beat a Markov switching regimes model in out-of-sample forecasting and, at the same time, the switching process provides additional information regarding the likelihood of price reversals, thus inducing market participants to offset the effects of QE interventions whenever they perceive unconventional monetary policy regimes as temporary.
- Markov switching regimes,
- random walk,
- quantitative easing,
- out-of-sample forecasts
Citation: Dimitris G. Kirikos. An evaluation of quantitative easing effectiveness based on out-of-sample forecasts[J]. National Accounting Review, 2022, 4(4): 378-389. doi: 10.3934/NAR.2022021

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Abstract

A line of defense of quantitative easing (QE) policies has been developed around empirical evidence that time series models do not predict long-term asset prices and yields as well as naive random walk forecasts, implying that predictions of price reversals cannot be profitable and, therefore, that QE effects are not reversed. However, in this work we present evidence that for the Eurozone, Sweden, and the UK, which have pursued QE interventions, a random walk does not beat a Markov switching regimes model in out-of-sample forecasting and, at the same time, the switching process provides additional information regarding the likelihood of price reversals, thus inducing market participants to offset the effects of QE interventions whenever they perceive unconventional monetary policy regimes as temporary.

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