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Nominal rigidities in debt and product markets

Author

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  • Garriga, Carlos

    () (Federal Reserve Bank of St. Louis)

  • Kydland, Finn E.

    () (University of California–Santa Barbara and NBER)

  • Sustek, Roman

    (Queen Mary University of London)

Abstract

Standard models used for monetary policy analysis rely on sticky prices. Recently, the literature started to explore also nominal debt contracts. Focusing on mortgages, this paper compares the two channels of transmission within a common framework. The sticky price channel is dominant when shocks to the policy interest rate are temporary, the mortgage channel is important when the shocks are persistent. The first channel has significant aggregate effects but small redistributive effects. The opposite holds for the second channel. Using yield curve data decomposed into temporary and persistent components, the redistributive and aggregate consequences are found to be quantitatively comparable.

Suggested Citation

  • Garriga, Carlos & Kydland, Finn E. & Sustek, Roman, 2016. "Nominal rigidities in debt and product markets," Working Papers 2016-17, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2016-017
    DOI: 10.20955/wp.2016.017
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    References listed on IDEAS

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    1. Olivier Coibion & Yuriy Gorodnichenko & Lorenz Kueng & John Silvia, 2012. "Innocent Bystanders? Monetary Policy and Inequality in the U.S," NBER Working Papers 18170, National Bureau of Economic Research, Inc.
    2. Huffman, Gregory W. & Wynne, Mark A., 1999. "The role of intratemporal adjustment costs in a multisector economy," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 317-350, April.
    3. Den Haan, Wouter & Rendahl, Pontus & Riegler, Markus, 2015. "Unemployment (Fears) and Deflationary Spirals," CEPR Discussion Papers 10814, C.E.P.R. Discussion Papers.
    4. 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.
    5. Aaron Hedlund, 2015. "Failure to Launch: Housing, Debt Overhang, and the Inflation Option During the Great Recession," Working Papers 1515, Department of Economics, University of Missouri.
    6. Sterk, Vincent & Tenreyro, Silvana, 2013. "The transmission of monetary policy operations through redistributions and durable purchases," LSE Research Online Documents on Economics 58311, London School of Economics and Political Science, LSE Library.
    7. Jens Hilscher & Alon Raviv & Ricardo Reis, 2014. "Inflating Away the Public Debt? An Empirical Assessment," NBER Working Papers 20339, National Bureau of Economic Research, Inc.
    8. Adrien Auclert, 2015. "Monetary Policy and the Redistribution Channel," 2015 Meeting Papers 381, Society for Economic Dynamics.
    9. Gornemann, Nils & Kuester, Keith & Nakajima, Makoto, 2016. "Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy," CEPR Discussion Papers 11233, C.E.P.R. Discussion Papers.
    10. Michael U. Krause & Stéphane Moyen, 2016. "Public Debt and Changing Inflation Targets," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 142-176, October.
    11. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    12. 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.
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    Cited by:

    1. Cesa-Bianchi, Ambrogio & Rebucci, Alessandro, 2017. "Does easing monetary policy increase financial instability?," Journal of Financial Stability, Elsevier, vol. 30(C), pages 111-125.
    2. repec:kuk:journl:v:50:y:2017:i:4:p:455-488 is not listed on IDEAS
    3. repec:rba:rbaacv:acv2017-04 is not listed on IDEAS
    4. repec:eee:jmacro:v:54:y:2017:i:pb:p:161-186 is not listed on IDEAS
    5. Adam M. Guren & Arvind Krishnamurthy & Timothy J. McQuade, 2018. "Mortgage Design in an Equilibrium Model of the Housing Market," NBER Working Papers 24446, National Bureau of Economic Research, Inc.
    6. Hristov, Nikolay & Hülsewig, Oliver, 2017. "Unexpected loan losses and bank capital in an estimated DSGE model of the euro area," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 161-186.
    7. Claudio Borio & Boris Hofmann, 2017. "Is Monetary Policy Less Effective When Interest Rates Are Persistently Low?," RBA Annual Conference Volume,in: Jonathan Hambur & John Simon (ed.), Monetary Policy and Financial Stability in a World of Low Interest Rates Reserve Bank of Australia.

    More about this item

    Keywords

    Mortgage contracts; sticky prices; monetary policy; yield curve; redistributive vs. aggregate effects.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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