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Nominal Debt Dynamics, Credit Constraints and Monetary Policy

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Author Info

  • Graham Liam

    ()
    (University College London)

  • Wright Stephen

    ()
    (Birkbeck College, London)

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.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 7 (2007)
Issue (Month): 1 (January)
Pages: 1-50

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Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:9

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Cited by:
  1. Fujiwara, Ippei & Teranishi, Yuki, 2011. "Real exchange rate dynamics revisited: A case with financial market imperfections," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1562-1589.
  2. Christopher Allsopp & David Vines, 2008. "Fiscal Policy, intercountry adjustment and the real exchange rate within Europe," European Economy - Economic Papers 344, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  3. Tatiana Kirsanova & Jack Rogers, 2013. "Fixed versus Variable Rate Debt Contracts and Optimal Monetary Policy," Discussion Papers 1306, Exeter University, Department of Economics.

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