Nominal debt as a burden on monetary policy

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dc.contributor.author Díaz-Giménez, Javier
dc.contributor.author Giovannetti, Giorgia
dc.contributor.author Marimon, Ramón
dc.contributor.author Teles, Pedro
dc.contributor.other Centre for Economic Policy Research
dc.date.accessioned 2009-08-24T11:11:43Z
dc.date.available 2009-08-24T11:11:43Z
dc.date.issued 2007
dc.identifier.uri http://hdl.handle.net/10016/4974
dc.description.abstract We characterize the optimal sequential choice of monetary policy in economies with either nominal or indexed debt. In a model where nominal debt is the only source of time inconsistency, the Markov-perfect equilibrium policy implies the progressive depletion of the outstanding stock of debt, until the time inconsistency disappears. There is a resulting welfare loss if debt is nominal rather than indexed. We also analyze the case where monetary policy is time inconsistent even when debt is indexed. In this case, with nominal debt, the sequential optimal policy converges to a time-consistent steady state with positive -- or negative -- debt, depending on the value of the intertemporal elasticity of substitution. Welfare can be higher if debt is nominal rather than indexed and the level of debt is not too high.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.relation.ispartofseries Working paper
dc.relation.ispartofseries 6595
dc.subject.other indexed debt
dc.subject.other Markov-perfect equilibrium
dc.subject.other nominal debt
dc.subject.other optimal monetary policy and time consistency
dc.title Nominal debt as a burden on monetary policy
dc.type workingPaper
dc.subject.eciencia Economía
dc.rights.accessRights openAccess
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