International Transmission Channels of U.S. Quantitative Easing: Evidence from Canada

The U.S. Federal Reserve responded to the great recession by implementing quantitative easing, or large-scale asset purchases, when its conventional policy rate reached the zero lower bound. We assess the international spillover effects of this quantitative easing program on the Canadian economy in a factor-augmented vector autoregression (FAVAR) framework, by considering a counterfactual scenario in which the Federal Reserve's long-term asset holdings do not rise in response to the recession. We find that U.S. quantitative easing boosted Canadian output, mainly through the financial channel.