Has Quantitative Easing Affected the Predictive Power of the Yield Curve? Evidence from Nine Advanced Economies

Abstract: Since the global financial crisis in 2007-2008 several central banks around the world have introduced Quantitative Easing. Earlier literature has proven that this has caused significant downward pressure on yields in many economies. This study examines if the introduction of Quantitative Easing has changed the predictive power of the yield curve on future economic activity in nine advanced economies. The empirical results show that the yield spreads ability to predict future economic activity varies across lag lengths and countries where the highest goodness of fit is achieved for the United States. Furthermore, this study provides some indications that the level of a central banks balance sheet has some effect on the marginal effect of the yield spread on future economic activity. However, more research is needed to understand the effects caused by Quantitative Easing entirely.