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

Sheedy, Kevin D. (2014) Debt and incomplete financial markets: a case for nominal GDP targeting. Brookings Papers on Economic Activity, 2014 (Spring). 301 - 373. ISSN 0007-2303

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For many households borrowing is possible only by accepting a financial contract that specifies a fixed repayment stream. However, the future income that will repay this debt is uncertain, so risk can be inefficiently distributed. This paper shows that when debt contracts are written in terms of money, a monetary policy of nominal GDP targeting improves the functioning of financial markets. By insulating households’ nominal incomes from aggregate real shocks, this policy effectively achieves risk sharing by stabilizing the ratio of debt to income. The paper also shows that when there is price stickiness, the objective of improving risk sharing should still receive considerable weight in the conduct of monetary policy relative to stabilizing inflation.

Item Type: Article
Official URL:
Additional Information: © 2014 The Brookings Institution
Divisions: Economics
Centre for Economic Performance
Subjects: H Social Sciences > HG Finance
Date Deposited: 21 Apr 2016 11:03
Last Modified: 20 Aug 2021 02:02

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