Debt and Incomplete Financial Markets: A Case for Nominal GDP Targeting
AbstractFinancial markets are incomplete, thus for many agents borrowing is possible only by accepting a financial contract that specifies a fixed repayment. However, the future income that will repay this debt is uncertain, so risk can be inefficiently distributed. This paper argues that a monetary policy of nominal GDP targeting can improve the functioning of incomplete financial markets when incomplete contracts are written in terms of money. By insulating agents' nominal incomes from aggregate real shocks, this policy effectively completes the market by stabilizing the ratio of debt to income. The paper argues that the objective of nominal GDP should receive substantial weight even in an environment with other frictions that have been used to justify a policy of strict inflation targeting.
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Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1209.
Date of creation: May 2013
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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP
incomplete markets; heterogeneous agents; risk sharing; nominal GDP targeting;
Other versions of this item:
- Sheedy, Kevin D., 2014. "Debt and Incomplete Financial Markets: A Case for Nominal GDP Targeting," CEPR Discussion Papers 9843, C.E.P.R. Discussion Papers.
- Kevin D. Sheedy, 2013. "Debt and incomplete financial markets: a case for nominal GDP targeting," LSE Research Online Documents on Economics 51545, London School of Economics and Political Science, LSE Library.
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-05-22 (All new papers)
- NEP-MAC-2013-05-22 (Macroeconomics)
- NEP-MON-2013-05-22 (Monetary Economics)
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