Nominal debt as a burden on monetary policy

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

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

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 commtiment to fiscal policy. If there is full commitment to an optimal fiscal policy, then the resulting monetary policy is the Friedman rule of zero nominal interest rates.

Keywords: Time-consistency; monetary policy; debt; recursive equilibrium (search for similar items in EconPapers)
JEL-codes: E40 E52 E61 (search for similar items in EconPapers)
Date: 2003-01, Revised 2006-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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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 (2004)
Working Paper: Nominal Debt as a Burden to Monetary Policy (2000)
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