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Debt and incomplete financial markets: a case for nominal GDP targeting


  • Sheedy, Kevin D.


Financial 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.

Suggested Citation

  • Sheedy, Kevin D., 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.
  • Handle: RePEc:ehl:lserod:51545

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    References listed on IDEAS

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    Cited by:

    1. Williams, John C., 2014. "Financial stability and monetary policy: happy marriage or untenable union?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    2. Williams, John C., 2015. "Macroprudential policy in a microprudential world," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    3. Adrien Auclert, 2015. "Monetary Policy and the Redistribution Channel," 2015 Meeting Papers 381, Society for Economic Dynamics.
    4. Bullard, James B. & Singh, Aarti, 2016. "Incomplete Credit Markets and Monetary Policy with Heterogeneous Labor Supply : a presentation at Bank of Korea 2016 Conference, Employment and Growth, Seoul, Korea, May 30, 2016," Speech 270, Federal Reserve Bank of St. Louis.
    5. Koch, Christoffer, 2015. "Deposit interest rate ceilings as credit supply shifters: Bank level evidence on the effects of Regulation Q," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 316-326.
    6. Carlos Garriga & Finn E. Kydland & Roman Sustek, 2013. "Mortgages and Monetary Policy," NBER Working Papers 19744, National Bureau of Economic Research, Inc.
    7. repec:eee:jmacro:v:54:y:2017:i:pa:p:90-99 is not listed on IDEAS
    8. Philippe Bacchetta & Elena Perazzi & Eric van Wincoop, 2015. "Self-Fulfilling Debt Crises: Can Monetary Policy Really Help?," NBER Working Papers 21158, National Bureau of Economic Research, Inc.
    9. Azariadis, Costas & Bullard, James B. & Singh, Aarti & Suda, Jacek, 2015. "Optimal Monetary Policy at the Zero Lower Bound," Working Papers 2015-10, Federal Reserve Bank of St. Louis.
    10. Beck, Thorsten & Colciago, Andrea & Pfajfar, Damjan, 2014. "The role of financial intermediaries in monetary policy transmission," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 1-11.
    11. Azariadis, Costas & Bullard, James & Singh, Aarti & Suda, Jacek, 2015. "Incomplete Credit Markets and Monetary Policy," Working Papers 2015-12, University of Sydney, School of Economics, revised Feb 2017.
    12. Jae Won Lee, 2014. "Monetary Policy with Heterogeneous Households and Imperfect Risk-Sharing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(3), pages 505-522, July.
    13. repec:eee:jmacro:v:54:y:2017:i:pa:p:127-147 is not listed on IDEAS
    14. Williams, John C., 2014. "Inflation targeting and the global financial crisis: successes and challenges," Speech 134, Federal Reserve Bank of San Francisco.
    15. repec:eee:jmacro:v:54:y:2017:i:pa:p:110-126 is not listed on IDEAS
    16. Matthew Hoelle & M. Udara Peiris, 2013. "On the Efficiency of Nominal GDP Targeting in a Large Open Economy," Purdue University Economics Working Papers 1273, Purdue University, Department of Economics.
    17. Evan F. Koenig, 2013. "Like a Good Neighbor: Monetary Policy, Financial Stability, and the Distribution of Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 57-82, June.

    More about this item

    JEL classification:

    • 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


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