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Forward guidance with an escape clause : when half a promise is better than a full one

Maria Lucia
Florez-Jimenez
Julián Andrés
Parra-Polanía
Sábado, 1 Marzo 2014

Using a three-equation New Keynesian model we find that incorporating an escape clause (EC) into Forward Guidance (FG) is welfare improving as it allows the monetary authority to avoid cases in which the cost of reduced flexibility is too high. The EC pro