Nominal Debt as a Burden on Monetary Policy

Pedro Teles, Javier Díaz-Giménez, Giorgia Giovannetti () and Ramon Marimon
Authors registered in the RePEc Author Service: Javier Díaz-Giménez

No 8, Working Papers from Barcelona School of Economics

Abstract: We study the effects of nominal debt on the optimal sequential choice of monetary policy. When the stock of debt is nominal, the incentive to generate unanticipated inflation increases the cost of the outstanding debt even if no unanticipated inflation episodes occur in equilibrium. Without full commitment, the optimal sequential policy is to deplete the outstanding stock of debt progressively until these extra costs disappear. Nominal debt is therefore a burden on monetary policy, not only because it must be serviced, but also because it creates a time inconsistency problem that distorts interest rates. The introduction of alternative forms of taxation may lessen this burden, if there is enough commitment to fiscal policy. Full commitment for the fiscal authority can override any commitment problem of the monetary authority.

JEL-codes: E40 E50 E58 E60 (search for similar items in EconPapers)
Date: 2015-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Nominal Debt as a Burden on Monetary Policy (2008)
Working Paper: Nominal Debt as a Burden on Monetary Policy (2007)
Working Paper: Nominal Debt as a Burden on Monetary Policy (2007)
Working Paper: Nominal Debt as a Burden on Monetary Policy (2007)
Working Paper: Nominal Debt as a Burden on Monetary Policy (2006)
Working Paper: Nominal debt as a burden on monetary policy (2006)
Working Paper: Nominal debt as a burden on monetary policy (2004)
Working Paper: Nominal Debt as a Burden to Monetary Policy (2000)
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