Monetary policy evaluation. A counterfactual analysis based on dynamic factor models

ABSTRACT

This article complements the recent literature analysing the effects of the unconventional monetary stimuli applied after the Great Recession by proposing an intuitive and easy-to-implement method to evaluate different exit strategies towards a traditional monetary context. This approach, useful for central bankers or researchers interested in the effects of tapering, allows us to evaluate the consequences of a given monetary policy path on the future evolution of key macroeconomic indicators. The results based on this methodology provide a measurement of the differences in economic performance under contractionary and expansionary policies and support the recent success of monetary stimuli in boosting real indicators while having little effect on inflation.

KEYWORDS:

• Monetary policy
• quantitative easing
• zero lower bound
• shadow rate
• tapering

JEL CLASSIFICATION:

• C32
• E47
• E52
• E58

Acknowledgements

I thank Gabriel Perez-Quiros and Mihaly Borsi (Banco de España), Maximo Camacho Alonso (Universidad de Murcia) and Ishak Demir (Birkbeck University of London) for their useful comments. This work was supported by the Ministerio de Economía y Competitividad and the Fondo Europeo de Desarrollo Regional [Grant ECO2015-70331-C2-2-R (MINECO/FEDER)].

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ Root of the sum of the squared differences between each time observation.

² The sudden decline in the IPI after the end of the sample period is not correctly captured by the model due to the recent drop in oil and gas production.

Additional information

Funding

This work was supported by the MINECO/FEDER [Grant ECO2015-70331-C2-2-R].