Modelling the dynamics of unconventional monetary policies’ impact on professionals’ forecasts

Abstract

This study quantifies the effects of the Fed's quantitative easing (QE) and tapering programs’ announcements on professionals’ consensus forecasts of U.S. macroeconomic and financial variables at different forecast horizons. The results of a vector autoregression (VAR) analysis show that the first QE (QE1) program is more effective in terms of significantly affecting the variability of near and medium term forecasts on GDP, inflation and short-term interest rates. This is not the case for these variables of long forecast horizons across all QE/tapering announcements, the forecasts of U.S. currency and long-term rates present significant short-lived responses, while the tapering displays a dominant effect on the volatility of long-term rates across long-term forecast horizons. A dynamic correlation analysis among different horizon forecasts also reveals that the Fed successfully anchor inflation and real economic growth expectations during the expansionary policy (QE) periods. Additional findings show the anchoring of the expectations across different horizons on short-term rates, as opposed to long-term rates, during the QE1 program. During the contractionary (tapering) period, the decrease in the correlations among different horizons for the short-term rates’ forecasts is a sign that the Fed increases the range of possible outcomes and highlights a signal of a monetary policy change. © 2020 Elsevier B.V.