Leaning Against the Credit Cycle
Paolo Gelain (),
Kevin Lansing () and
No 2017-18, Working Paper Series from Federal Reserve Bank of San Francisco
How should a central bank act to stabilize the debt-to-GDP ratio? We show how the persistent nature of household debt shapes the answer to this question. In environments where households repay mortgages gradually, surprise interest hikes only weakly influence household debt, and tend to increase debt-to-GDP in the short run while reducing it in the medium run. Interest rate rules with a positive weight on debt-to-GDP cause indeterminacy. Compared to inflation targeting, debt-to-GDP stabilization calls for a more expansionary policy when debt-to-GDP is high, so as to deflate the debt burden through inflation and output growth.
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: Leaning Against the Credit Cycle (2018)
Working Paper: Leaning Against the Credit Cycle (2015)
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