International Spillovers of Forward Guidance Shocks

After 2007, countries that cut their policy interest rates close to zero turned, amongother policies, to forward guidance. We estimate a two-country model of the U.S. andCanada to quantify how unexpected changes in U.S. forward guidance affected Canada.Expansionary U.S. forward guidance shocks, like conventional policy shocks, are beggar-thy-neighborand depress Canadian output, but by twice as much as conventionalshocks. We find that the effect of U.S. forward guidance shocks on Canadian output,unlike conventional policy shocks, depends on the state of U.S. demand and can be fivetimes smaller when U.S. demand is weak