Exiting From QE

We propose an empirical framework for analyzing the macroeconomic effects of quantitative easing (QE) and apply it to Japan. QE is modeled using a structural regime-switching vector regression framework with two distinct monetary policy rules, endogenous switching between them depending on the size of the policy interest rate and an exit condition for terminating QE that reflects the Bank of Japan's stated exit criteria. We find that higher reserves at the effective lower bound (ELB) raise inflation and output and that terminating QE may either be contractionary or expansionary depending on the state of the economy at the point of exit