Nominal debt as a burden on monetary policy

Javier Díaz-Giménez, Giorgia Giovannetti (), Ramon Marimon and Pedro Teles

No WP-04-10, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: We study the effects of nominal debt on the optimal sequential choice of monetary and debt 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.

Keywords: Debts, Public; Financial crises; Fiscal policy; Monetary policy (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-mon
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Citations: View citations in EconPapers (13)

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Related works:
Working Paper: Nominal Debt as a Burden on Monetary Policy (2015)
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 to Monetary Policy (2000)
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