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Nominal debt dynamics, credit constraints and monetary policy

Graham, L.; Wright, S.; (2007) Nominal debt dynamics, credit constraints and monetary policy. The B.E. Journal of Macroeconomics , 7 (1) (Contributions) Article 9. Green open access

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Abstract

We construct a dynamic general equilibrium model in which household debt is sticky in nominal terms and debtor households are credit constrained. Interest payments on debt contracts may be at floating rates or fixed for the duration of the contract. A key result is that a simple static Taylor Rule can result in a prolonged period in which real interest rates are cut rather than raised in response to an inflationary shock. We show how the proportion of fixed rate contracts affects the monetary transmission mechanism and its implications for the distributional effects of an inflationary shock.

Type: Article
Title: Nominal debt dynamics, credit constraints and monetary policy
Open access status: An open access version is available from UCL Discovery
Publisher version: http://www.bepress.com/bejm/vol7/iss1/art9
Language: English
Keywords: JEL classification: D14, E31, E43, E52. Equilibrium, interest rates, interest, monetary policy, monetary, policy
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/3839
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