International Spillovers of Unconventional Monetary Policy

We measure how forward guidance in the United States at its zero lower bound affects a small open economy. Using piecewise linear methods, we jointly estimate the structural parameters of a two-country model and the expected durations of the fixed interest rate regimes in the US and Canada. We decompose the durations into a component implied by the constraint itself and calendar-based forward guidance. We conduct counterfactuals and find that without forward guidance in the US, monetary policy in Canada would not have been as constrained by its effective lower bound because its exchange rate would have appreciated significantly less.