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

Borradores de Economia
Number: 
811
Published: 
Classification JEL: 
E47, E52, E58
Keywords: 
Human capital agglomeration, Social returns, Private returns, Externalities, Uncertainty, Fiscal policy
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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