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Monetary policy, financial stability, and the distribution of risk

  • Evan F. Koenig

In an economy in which debt obligations are fixed in nominal terms, but there are otherwise no nominal rigidities, a monetary policy that targets inflation inefficiently concentrates risk, tending to increase the financial distress that accompanies adverse real shocks. Nominal-income targeting spreads risk more evenly across borrowers and lenders, reproducing the equilibrium that one would observe if there were perfect capital markets. Empirically, inflation surprises have no independent influence on measures of financial strain once one controls for shocks to nominal GDP.

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File URL: http://www.dallasfed.org/assets/documents/research/papers/2011/wp1111.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 1111.

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Date of creation: 2011
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Handle: RePEc:fip:feddwp:1111
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  1. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November.
  2. Meade, James E., 1977. "The Meaning of "Internal Balance"," Nobel Prize in Economics documents 1977-2, Nobel Prize Committee.
  3. Matthias Doepke & Martin Schneider, 2006. "Inflation and the Redistribution of Nominal Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1069-1097, December.
  4. Evan F. Koenig, 1995. "Optimal monetary policy in an economy with sticky nominal wages," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 24-31.
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