Unconventional Monetary Policy in a Small Open Economy

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 zerolower bound (ZLB) we estimate a Bayesian structural vector autoregressive model for Canada - auseful case where foreign shocks can be proxied by U.S. variables alone. We find that, during theZLB period, Canadian unconventional monetary policy increased output (measured by industrialproduction) by 0.013 percent per month on average while US unconventional monetary policy raisedCanadian output by 0.127 percent per month on average. Our results demonstrate the effectiveness ofdomestic unconventional monetary policy and the strong positive spillover effects that foreignunconventional monetary policies can have in a small open economy