TY  - JOUR
AU  - Marimon,Ramon
AU  - Díaz-Giménez,Javier
AU  - Giovannetti,Giorgia
AU  - Teles,Pedro
TI  - Nominal Debt as a Burden on Monetary Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13677
PY  - 2007
Y2  - December 2007
UR  - http://www.nber.org/papers/w13677
L1  - http://www.nber.org/papers/w13677.pdf
N1  - Author contact info:
Ramon Marimon
European University Institute
Max Weber Programme
Via delle Fontanelle 20
I-50016 San Domenico di Fiesole
ITALY
Tel: 34-93-542-2707
Fax: 34-93-542-1746
E-Mail: ramon.marimon@eui.eu

Javier Diaz-Gimenez
Universidad Carlos III
Department of Economics
28093 Getafe - Madrid
Spain
E-Mail: no email available

Giorgia Giovannetti
Università di Firenze
Department of Economics
Via dell Pandelle 9
I-50127 Firenze
Italy
E-Mail: giorgia.giovannetti@eui.eu

Pedro Teles
Banco de Portugal
R. Francisco Ribeiro 2
1150 Lisboa
Portugal
and Univ Catolica Portuguesa
and CEPR
E-Mail: no email available
AB  - We characterize the optimal sequential choice of monetary policy in economies with either nominal or indexed debt. In a model where nominal debt is the only source of time inconsistency, the Markov-perfect equilibrium policy implies the progressive depletion of the outstanding stock of debt, until the time inconsistency disappears. There is a resulting welfare loss if debt is nominal rather than indexed. We also analyze the case where monetary policy is time inconsistent even when debt is indexed. In this case, with nominal debt, the sequential optimal policy converges to a time-consistent steady state with positive -- or negative -- debt, depending on the value of the intertemporal elasticity of substitution. Welfare can be higher if debt is nominal rather than indexed and the level of debt is not too high.
ER  -