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Nominal Debt as a Burden on Monetary Policy

Ramon Marimon
Giorgia Giovannetti
Javier Días-Giménez
Ano de Divulgação 
Código JEL 
E40 - General
E50 - General
E58 - Central Banks and Their Policies
E60 - General
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.
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Publicado como 
Nominal Debt as a Burden on Monetary Policy