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Forward guidance with preferences over safe assets

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  • Ansgar Rannenberg

    (National Bank of Belgium)

Abstract

I develop a New Keynesian model with preferences over safe assets (POSA) calibrated using evidence on the wedge between household discount rates and market interest rates. POSA attenuate intertemporal consumption smoothing and thus the household’s responsiveness to future interest rates, the more so the more distant in time they are located, and imply a consumption wealth effect. Therefore, POSA substantially lower the macroeconomic effect of forward guidance policies. By contrast, POSA does not substantially change the effect of the standard shocks of Smets/Wouters (2007) type DSGE models. The results carry over to a model with Iacoviello (2005,2014)-type collateral constraints. Such constraints in themselves tend to strongly amplify the effect of forward guidance.

Suggested Citation

  • Ansgar Rannenberg, 2019. "Forward guidance with preferences over safe assets," Working Paper Research 364, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:201901-364
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    File URL: https://www.nbb.be/doc/ts/publications/wp/wp364en.pdf
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    References listed on IDEAS

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    Cited by:

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    2. Guillermo Santos, 2022. "Optimal fiscal and monetary policy with preference over safe assets," LIDAM Discussion Papers IRES 2022021, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    3. Ansgar Rannenberg, 2023. "The Rise in Inequality, the Decline in the Natural Interest Rate, and the Increase in Household Debt," International Journal of Central Banking, International Journal of Central Banking, vol. 19(2), pages 1-93, June.
    4. Dennis Bonam, 2020. "A convenient truth: The convenience yield, low interest rates and implications for fiscal policy," Working Papers 700, DNB.
    5. Rannenberg, Ansgar, 2021. "State-dependent fiscal multipliers with preferences over safe assets," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 1023-1040.
    6. Ansgar Rannenberg & Thomas Theobald, 2022. "Income inequality and the German export surplus," Working Paper Research 424, National Bank of Belgium.
    7. Zhao, Junzhu, 2023. "Wealth in utility, the Taylor principle and determinacy," Journal of Macroeconomics, Elsevier, vol. 76(C).
    8. Gregory de Walque & Thomas Lejeune & Ansgar Rannenberg & Magne Mogstad, 2023. "BEMGIE: Belgian Economy in a Macro General and International Equilibrium model," Working Paper Research 435, National Bank of Belgium.

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    More about this item

    Keywords

    Forward guidance puzzle; preferences over safe assets; monetary policy; collateral constraints;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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