Dynamic Debt Deleveraging and Optimal Monetary Policy

Pierpaolo Benigno, Federica Romei and Gauti Eggertsson

No 11180, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies optimal monetary policy under dynamic debt deleveraging once the zero bound is binding. Unlike much of the existing literature, the natural rate of interest is endogenous and depends on macroeconomic policy. We provide microfoundation for debt deleveraging based both on household over accumulation of debt and leverage constraint on banks; and show that they are isomorphic in our proposed post-crisis New Keynesian model, thus integrating two popular narrative for the crisis. Optimal monetary policy successfully raises the natural rate of interest by creating an environment that speeds up deleveraging, thus endogenously shortening the duration of the crisis and a binding zero bound. Inflation should be front loaded. Fiscal-policy multipliers can be even higher than in existing models, but depend on the way in which public spending is financed.

Date: 2016-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Dynamic Debt Deleveraging and Optimal Monetary Policy (2020)
Working Paper: Dynamic Debt Deleveraging and Optimal Monetary Policy (2015)
Working Paper: Dynamic Debt Deleveraging and Optimal Monetary Policy (2014)
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