Optimal Monetary Interventions in Credit Markets

Luis Araujo, Tai-Wei Hu

Research output: Contribution to journalArticle (Academic Journal)peer-review

5 Citations (Scopus)
55 Downloads (Pure)

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.
Original languageEnglish
Pages (from-to)455-487
Number of pages33
JournalJournal of Economic Theory
Volume178
Early online date12 Oct 2018
DOIs
Publication statusPublished - Nov 2018

Structured keywords

  • ECON Macroeconomics
  • ECON Microeconomic Theory

Keywords

  • money
  • credit
  • limited commitment
  • optimal monetary policy
  • mechanism design
  • inflation

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