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

Sheedy, Kevin D. ORCID: 0000-0002-0247-6323 (2013) Debt and incomplete financial markets: a case for nominal GDP targeting. CEP Discussion Papers (CEPDP1209). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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Abstract

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.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://cep.lse.ac.uk/_new/publications/series.asp?...
Additional Information:	© 2013 The Author
Divisions:	Centre for Economic Performance
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
JEL classification:	E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects)
Date Deposited:	08 Aug 2013 09:34
Last Modified:	13 Sep 2024 20:24
URI:	http://eprints.lse.ac.uk/id/eprint/51545

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