A BEJM Contributions article.

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.

Submitted: September 18, 2006 · Accepted: January 14, 2007 · Published: January 28, 2007

Recommended Citation

Graham, Liam and Wright, Stephen (2007) "Nominal Debt Dynamics, Credit Constraints and Monetary Policy," The B.E. Journal of Macroeconomics: Vol. 7 : Iss. 1 (Contributions), Article 9.
DOI: 10.2202/1935-1690.1502
Available at: http://www.bepress.com/bejm/vol7/iss1/art9