The power of forward guidance: The role of social transfer

Abstract

We examine the relationship between the generosity of social transfer and the stimulative effect of forward guidance. Increasing social transfer makes households less concerned about income risk, making them more responsive to future changes in interest rates. To assess this possibility quantitatively, we construct a New Keynesian incomplete market model economy that includes social transfer. The results show that the stimulative effect of forward guidance is stronger in the model economy with twice the level of social transfer than in the model economy with the current level of United States’ social transfer.