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Nominal Debt as a Burden on Monetary Policy

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  • Javier Díaz-Giménez
  • Giorgia Giovanetti
  • Ramon Marimon
  • Pedro Teles

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 commitment to fiscal policy. Full commitment for the fiscal authority can override any commitment problem of the monetary authority.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 8.

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Date of creation: Jan 2003
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Handle: RePEc:bge:wpaper:8

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  1. Fernando Martin, 2009. "A Positive Theory of Government Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 608-631, October.
  2. V. V. Chari & Patrick J. Kehoe, 1998. "Optimal fiscal and monetary policy," Staff Report 251, Federal Reserve Bank of Minneapolis.
  3. Ramon Marimon & Javier Díaz-Giménez & Giorgia Giovannetti & Pedro Teles, 2007. "Nominal Debt as a Burden on Monetary Policy," NBER Working Papers 13677, National Bureau of Economic Research, Inc.
  4. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
  5. Catarina Reis, 2013. "Taxation without commitment," Economic Theory, Springer, vol. 52(2), pages 565-588, March.
  6. Juan Pablo Nicolini & Ramon Marimon & Pedro Teles, 2001. "Inside Outside Money Competition," Department of Economics Working Papers 004, Universidad Torcuato Di Tella.
  7. Martin Ellison & Neil Rankin, 2005. " Optimal Monetary Policy When Lump-Sum Taxes Are Unavailable: A Reconsideration of the Outcomes under Commitment and Discretion," CDMA Conference Paper Series 0501, Centre for Dynamic Macroeconomic Analysis.
  8. V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1991. "Optimal fiscal and monetary policy: some recent results," Proceedings, Federal Reserve Bank of Cleveland, pages 519-546.
  9. Persson, Mats & Persson, Torsten & Svenssor, Lars E. O., 2005. "Time Consistency of Fiscal and Monetary Policy: A Solution," Papers 09-03-2005, Princeton University, Research Program in Political Economy.
  10. Obstfeld, Maurice, 1997. "Dynamic Seigniorage Theory," Macroeconomic Dynamics, Cambridge University Press, vol. 1(03), pages 588-614, September.
  11. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  12. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
  13. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  14. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-44, October.
  15. Juan P. Nicolini, 1993. "More on the time inconsistency of optimal monetary policy," Economics Working Papers 56, Department of Economics and Business, Universitat Pompeu Fabra.
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