The international forward guidance transmission under a global liquidity trap

Abstract: This paper quantitatively explores the interaction effect of forward guidance (FG) on international monetary policy transmission using a standard two-country new Keynesian model with a global liquidity trap. First, we show that the magnitude of the constant risk aversion coefficient (CRRA) is important in determining the beggar-thy-neighbor and prosper-thy-neighbor effects in foreign economies when the home country only faces the zero lower bound (ZLB) constraints. Second,we demonstrate that both countries may benefit from adopting only the home country's FG policies if the home central bank only faces the ZLB. Third, we find the potential benefit of the FG interaction effect between two countries. Thus, we document the possibility that home and foreign central banks can benefit from monetary policy coordination by adopting the same duration of FG quarters.