International spillovers of forward guidance shocks

BIS Working Papers  |  No 870  | 
03 July 2020


Central banks whose policy rates have reached their effective lower bound have turned to unconventional policies, including forward guidance, to stimulate their economies. These policies have international ramifications. We explore how forward guidance policy in large economies, such as the United States, affects smaller economies, such as Canada.


We propose a novel definition of forward guidance shocks and show how to identify these shocks in estimated open economy models. We also provide quantitative estimates of the effect of US forward guidance policy on the US and Canadian economies.


Expansionary forward guidance shocks in the United States are contractionary for the Canadian economy. However, because of expansionary policy settings in Canada, including forward guidance from the Bank of Canada, the net effect of monetary policy settings over the past decade has been expansionary for both economies. Forward guidance spillovers are state-dependent, and are smaller when risk-aversion in the United States is high. The model's estimated forward guidance shocks are consistent with significant US monetary policy announcements, such as the introduction of calendar-based forward guidance.


We estimate a two-country model of the US and Canada over the post 2009 sample to study the cross-country spillovers of forward guidance shocks. To do so, we propose a method to identify forward guidance shocks during the fixed interest rate regime. US forward guidance shocks have a larger impact than conventional monetary policy shocks. A 2 quarter expansionary forward guidance shock decreases Canadian output by about 0.2% to 0.4% on impact. The effect of US forward guidance shocks on Canadian output, unlike conventional policy shocks, depends crucially on the state of the US risk premium shock. The estimated forward guidance shocks coincide with significant US monetary policy announcements such as the introduction of calendar based guidance.

JEL classification: E2, E4, E5, F4

Keywords: forward guidance shocks, identification, spillovers, zero lower bound