Quantitative easing, stock exchange, inflation and monetary paradigm in the US : lessons for emerging economies

The aim of this study is to analyze the role and explain the relationship between quantitative easing (and) the US stock market growth 1870-2020. We use spectral analysis and spectral Granger causality to explore the link. Empirical results show a high degree of coherence between quantitative easing and US stock market growth (R2 = 0.80). Spectral Granger causality test results validate results rejecting the null of no Granger causality. We test robustness results using Markov switching time-varying model 2003q1-2020q4. Markov switching model isolates two clear regimes. One with the rapidly expanding FED balance sheet (quantitative easing) and second, zero (or no) quantitative easing. Two regimes perfectly fit the data for 2003q1-2020q4 and quantitative easing episodes. To check for the US stock market link, we use S&P 500 price index as a quantitative easing predictor. Using the index gives us high precision in predicting quantitative easing episodes proving US stock market growth is the final target of the quantitative easing schemes.