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Monetary policy, financial stability, and the distribution of risk

Evan Koenig

No 1111, Working Papers from Federal Reserve Bank of Dallas

Abstract: In an economy in which debt obligations are fixed in nominal terms, but there are otherwise no nominal rigidities, a monetary policy that targets inflation inefficiently concentrates risk, tending to increase the financial distress that accompanies adverse real shocks. Nominal-income targeting spreads risk more evenly across borrowers and lenders, reproducing the equilibrium that one would observe if there were perfect capital markets. Empirically, inflation surprises have no independent influence on measures of financial strain once one controls for shocks to nominal GDP.

Keywords: Debt; Inflation risk (search for similar items in EconPapers)
Pages: 18 pages
Date: 2011
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-mac and nep-mon
Note: Published as: Koenig, Evan F. (2013), "Like a Good Neighbor: Monetary Policy, Financial Stability, and the Distribution of Risk," International Journal of Central Banking 9 (2): 57-82.
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DOI: 10.24149/wp1111

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