Unconventional Monetary Policy in a Small Open Economy
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Unconventional Monetary Policy in a Small Open Economy Margaux MacDonald1
· Michał Ksawery Popiel2
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract We investigate unconventional monetary policy in a small open economy using shadow interest rates to capture policy at the zero lower bound (ZLB) in a Bayesian structural vector autoregressive model for Canada - a useful case where foreign shocks can be proxied by the U.S. alone. We estimate that during the ZLB period, on average, Canadian unconventional monetary policy increased output by 0.13 percent, while US unconventional monetary policy increased Canadian output by 1.2 percent on average. Results demonstrate the effectiveness of domestic unconventional monetary policy and the strong spillovers from foreign unconventional monetary policy in a small open economy. Keywords Small open economy · Unconventional monetary policy · Bayesian structural VAR · Zero lower bound · International monetary policy transmission JEL Classification E52 · E58 · F42
We thank Gregor Smith, Allan Gregory, Morten Nielsen, an anonymous referee from the Bank of Canada’s student paper award competition, three anonymous referee’s from the Open Economies Review, and seminar participants at the Bank of Canada, Midwest Macro Meetings, Canadian Economics Association Meeting, and Queen’s University for thoughtful insights and constructive comments. This research was partially supported by funds from the Donald S. Rickerd Fellowship in Canadian-American Studies and the Bank of Canada PhD internship program. The views presented in this article are those of the authors and do not reflect those of Groupe d’analyse, Lt´ee or of the International Monetary Fund, its Executive Board, or Management. Margaux MacDonald
[email protected] Michał Ksawery Popiel [email protected] 1
Economist, International Monetary Fund, 700 19th St NW, Washington, DC 20431, USA
2
Economist, Analysis Group, 1190 avenue des Canadiens-de-Montr´eal, Tour Deloitte, Suite 1500, Montreal, Quebec H3B 0G7, Canada
M. MacDonald, M.K. Popiel
1 Introduction Following the 2008 global financial crisis, many central banks quickly exhausted their ability to stimulate economic activity as policy rates reached the zero lower bound (ZLB).1 To continue to encourage lending, they turned to unconventional measures, including direct market interventions through large scale asset purchases (LSAPs) and forward guidance, to influence expectations of the future short rate. Recent literature has quantified the effects of these policies on long term rates, asset prices, credit costs and (to a lesser extent) the real economy, and has generally focused on the domestic effects of such policies in large open economies, most notably the US.2 In contrast, this paper analyzes the effects of unconventional monetary policy measures in a small open economy, including spillovers from foreign unconventional monetary policy, a topic which has hitherto received relatively little attention.3 Specifically, we look at t
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