International Spillovers of Forward Guidance Shocks

Mariano Kulish

2018-09-11 - After 2008, countries that cut their policy interest rates close to zero turned, among other policies, to forward guidance. We estimate a two-country model of the US and Canada to quantify how unexpected changes in US forward guidance affected Canada. Expansionary US forward guidance shocks, like conventional policy shocks, are beggarthy-neighbour and depress Canadian output, but on average by twice as much as conventional shocks. The effect of US forward guidance shocks on Canadian output, unlike conventional policy shocks, depends on the state of US demand and can be five times smaller when US demand is weak.