The Federal Reserve’s Response to the Global Financial Crisis and its Effects: An Interrupted Time-Series Analysis of the Impact of its Quantitative Easing Programs

The financial crisis that started in the U.S. at the end of 2007 and later spread to other countries was the most severe economic and financial disaster since the Great Depression. The crisis began in the U.S. housing market in August 2007, rapidly extended to other sectors of the U.S. economy, and became global following the collapse of various U.S.-based international financial institutions. To counter the negative effects of the crisis, the Federal Reserve (the central bank of the United States) and other central banks conducted monetary policies that are widely considered unconventional. This master’s thesis examines the monetary policies the Federal Reserve implemented in response to the crisis. More specifically, the thesis analyzes the Federal Reserve’s quantitative easing (QE) programs, liquidity facilities, and forward guidance operations implemented from 2007 to 2018. The thesis’ detailed examination of these policies is concluded with an interrupted time-series (ITS) analysis of the causal effects of the QE programs on U.S. inflation and real GDP. The results of this design-based natural experimental approach show that the QE operations positively affected U.S. real GDP but did not significantly impact U.S. inflation. Specifically, it is found that, for the 2011Q2-2018Q4 post-QE period, real GDP per capita in the U.S. increased by an average of 231 dollars per quarter relative to how it would have changed had the QE programs not been conducted. Moreover, the results show that, in 2018Q4, ten years after the beginning of the Federal Reserve’s QE programs, real GDP per capita in the U.S. increased by 14% relative to what it would have been during that quarter had there not been the QE programs.