Nominal Debt Dynamics, Credit Constraints and Monetary Policy

Graham Liam () and Stephen Wright
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Graham Liam: University College London

The B.E. Journal of Macroeconomics, 2007, vol. 7, issue 1, 50

Abstract: We construct a dynamic general equilibrium model in which household debt is sticky in nominal terms and debtor households are credit constrained. Interest payments on debt contracts may be at floating rates or fixed for the duration of the contract. A key result is that a simple static Taylor Rule can result in a prolonged period in which real interest rates are cut rather than raised in response to an inflationary shock. We show how the proportion of fixed rate contracts affects the monetary transmission mechanism and its implications for the distributional effects of an inflationary shock.

Keywords: nominal debt; dynamic general equilibrium; monetary policy (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (24)

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DOI: 10.2202/1935-1690.1502

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