The effect of fiscal policy and forward guidance with preferences over wealth

I examine how the effects of fiscal policy and forward guidance are shaped by preferences over wealth calibrated based on microeconomic evidence on household saving behavior and individual discount rates in a stylized and a... [ view full abstract ]

I examine how the effects of fiscal policy and forward guidance are shaped by preferences over wealth calibrated based on microeconomic evidence on household saving behavior and individual discount rates in a stylized and a medium scale DSGE model. This assumption effectively limits the horizon of unconstrained households. Therefore, the contractionary effect of a permanent cut in government expenditure implemented during a period when monetary policy is constrained by the zero lower bound becomes larger due to smaller crowding in of unconstrained household consumption. Furthermore, the assumption much reduces the effect of forward guidance on the future policy interest rate.