Nominal Debt Dynamics and Monetary Policy

30 Pages Posted: 9 Oct 2004

See all articles by Liam Graham

Liam Graham

University College London - Department of Economics

Stephen H. Wright

Birkbeck College, University of London

Date Written: July 20, 2004

Abstract

How is the impact of monetary policy affected by the nature of nominal debt contracts? How does this change if the interest payments on the debt are fixed or floating? To address these questions, we add a model of financial institutions' behaviour to a dynamic general equilibrium model in which some households face credit constraints. We analyse these affects of inflationary shocks, and derive implications for monetary policy. We question the common view that inflationary shocks necessarily result in debtors increasing their consumption. We also provide a potential explanation for interest rate smoothing on the part of central banks.

Keywords: Nominal debt; dynamic general equilibrium, monetary policy

JEL Classification: E30, E44

Suggested Citation

Graham, Liam and Wright, Stephen H., Nominal Debt Dynamics and Monetary Policy (July 20, 2004). Available at SSRN: https://ssrn.com/abstract=601283 or http://dx.doi.org/10.2139/ssrn.601283

Liam Graham (Contact Author)

University College London - Department of Economics ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Stephen H. Wright

Birkbeck College, University of London ( email )

Malet St
London, WC1 E7HX
United Kingdom

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