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

Abstract

<abstract> <p>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.</p> </abstract>