Abstract
We characterize optimal credit market interventions with respect to two
fundamental frictions---limited commitment and limited monitoring. We
consider two classes of interventions: an inflationary policy which uses
inflation tax to forgive private debt, and a deflationary policy which uses
credit tax to increase the real rate of return on money. We show that both
money and debt are essential and that intervention is generically optimal.
The nature of the optimal intervention depends on the fundamentals of the
economy and we provide conditions under which the optimal intervention is
inflationary and under which it is deflationary. Our results hold
irrespective of whether we use a bargaining protocol or optimal trading
mechanisms.
fundamental frictions---limited commitment and limited monitoring. We
consider two classes of interventions: an inflationary policy which uses
inflation tax to forgive private debt, and a deflationary policy which uses
credit tax to increase the real rate of return on money. We show that both
money and debt are essential and that intervention is generically optimal.
The nature of the optimal intervention depends on the fundamentals of the
economy and we provide conditions under which the optimal intervention is
inflationary and under which it is deflationary. Our results hold
irrespective of whether we use a bargaining protocol or optimal trading
mechanisms.
| Original language | English |
|---|---|
| Pages (from-to) | 455-487 |
| Number of pages | 33 |
| Journal | Journal of Economic Theory |
| Volume | 178 |
| Early online date | 12 Oct 2018 |
| DOIs | |
| Publication status | Published - Nov 2018 |
Research Groups and Themes
- ECON Macroeconomics
- ECON Microeconomic Theory
Keywords
- money
- credit
- limited commitment
- optimal monetary policy
- mechanism design
- inflation
