Nominal Debt as a Burden on Monetary Policy / Ramon Marimon, Javier Díaz-Giménez, Giorgia Giovannetti, Pedro Teles.

Format:

Book

Author/Creator:

Marimon, Ramon.

Contributor:

National Bureau of Economic Research.

Díaz-Giménez, Javier.

Giovannetti, Giorgia.

Teles, Pedro.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13677.

NBER working paper series no. w13677

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

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.

Notes:

Print version record

December 2007.