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Nominal Debt Dynamics, Credit Constraints and Monetary Policy

Author

Listed:
  • 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.

Suggested Citation

  • Graham Liam & Wright Stephen, 2007. "Nominal Debt Dynamics, Credit Constraints and Monetary Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-50, January.
  • Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:9
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Kydland, Finn E. & Rupert, Peter & Šustek, Roman, 2014. "Housing dynamics over the business cycle," LSE Research Online Documents on Economics 86334, London School of Economics and Political Science, LSE Library.
    2. repec:csg:ajrcwp:06 is not listed on IDEAS
    3. Ippei Fujiwara & Yuki Teranishi, 2009. "Financial Stability in Open Economies," IMES Discussion Paper Series 09-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
    4. Fujiwara, Ippei & Teranishi, Yuki, 2017. "Financial frictions and policy cooperation: A case with monopolistic banking and staggered loan contracts," Journal of International Economics, Elsevier, pages 19-43.
    5. Christopher Allsopp & David Vines, 2008. "Fiscal Policy, intercountry adjustment and the real exchange rate within Europe," European Economy - Economic Papers 2008 - 2015 344, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    6. Kydland, Finn & Rupert, Peter & Sustek, Roman, 2012. "Housing Dynamics over the Business Cycle," University of California at Santa Barbara, Economics Working Paper Series qt7bn5k73m, Department of Economics, UC Santa Barbara.
    7. Carlos Garriga & Finn E. Kydland & Roman Sustek, 2013. "Mortgages and Monetary Policy," NBER Working Papers 19744, National Bureau of Economic Research, Inc.
    8. 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.
    9. Yuki Teranishi, 2015. "Smoothed Interest Rate Setting by Central Banks and Staggered Loan Contracts," Economic Journal, Royal Economic Society, vol. 125(582), pages 162-183, February.
    10. Kydland, Finn & Rupert, Peter & Sustek, Roman, 2012. "Housing Dynamics over the Business Cycle," University of California at Santa Barbara, Economics Working Paper Series qt7bn5k73m, Department of Economics, UC Santa Barbara.
    11. Parente Paulo M.D.C. & Santos Silva João M.C., 2016. "Quantile Regression with Clustered Data," Journal of Econometric Methods, De Gruyter, pages 1-15.
    12. Margarita Rubio, 2015. "Monetary and Macroprudential Policies under Fixed and Variable Interest Rates," Discussion Papers 2015/10, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).

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