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Using the method of Haberis and Lipinska (2020), this paper explores theeffect of forward guidance (FG) in a two-country New Keynesian (NK) economyunder the zero lower bound (ZLB). We simulate the effect of different lengthsof FG or the zero interest rate policy under the circumstance of the globalliquidity trap. We show that the size of the intertemporal elasticity ofsubstitution plays an important role in determining the beggar-thy-neighboreffect or the prosper-thy-neighbor effect of home FG policy on the foreigneconomy. And in the former case, by targeting a minimum welfare loss of theindividual country alone but not global welfare loss, two central banks canperform interesting FG bargaining in which they cooperatively adopt the samelength of FG or strategically deviate from cooperation.

The interaction of forward guidance in a two-country new Keynesian model