The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper investigates the effects of unconventional monetary policy in a small open economy.
Using recently proposed shadow interest rates to capture unconventional monetary policy at the zero
lower bound (ZLB) we estimate a Bayesian structural vector autoregressive model for Canada - a
useful case where foreign shocks can be proxied by U.S. variables alone. We find that, during the
ZLB period, Canadian unconventional monetary policy increased output (measured by industrial
production) by 0.013 percent per month on average while US unconventional monetary policy raised
Canadian output by 0.127 percent per month on average. Our results demonstrate the effectiveness of
domestic unconventional monetary policy and the strong positive spillover effects that foreign
unconventional monetary policies can have in a small open economy.