Fed paper models new transmission channels of forward guidance

The ability of households to borrow creates three redistribution mechanisms that amplify the effectiveness of forward guidance in spurring economic activity, researchers from the Federal Reserve find.

In a recent paper, Francesco Ferrante and Matthias Paustian examine the transmission mechanisms of forward guidance on household behaviour. In contrast to other comparable studies, however, the authors examine the effects under a model that allows households to borrow and lend.

“Household debt

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