Debt and incomplete financial markets: a case for nominal GDP targeting

Kevin Sheedy

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: For many households borrowing is possible only by accepting a financial contract that specifies a fixed repayment stream. However, the future income that will repay this debt is uncertain, so risk can be inefficiently distributed. This paper shows that when debt contracts are written in terms of money, a monetary policy of nominal GDP targeting improves the functioning of financial markets. By insulating households’ nominal incomes from aggregate real shocks, this policy effectively achieves risk sharing by stabilizing the ratio of debt to income. The paper also shows that when there is price stickiness, the objective of improving risk sharing should still receive considerable weight in the conduct of monetary policy relative to stabilizing inflation.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2014-03
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Citations: View citations in EconPapers (68)

Published in Brookings Papers on Economic Activity, March, 2014, 2014(Spring), pp. 301 - 373. ISSN: 0007-2303

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Related works:
Journal Article: Debt and Incomplete Financial Markets: A Case for Nominal GDP Targeting (2014)
Working Paper: Debt and Incomplete Financial Markets: A Case for Nominal GDP Targeting (2014)
Working Paper: Debt and Incomplete Financial Markets: A Case for Nominal GDP Targeting (2013)
Working Paper: Debt and incomplete financial markets: a case for nominal GDP targeting (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:66196

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