Debt constraints and monetary policy

Diemo Dietrich, Jong Shin, Mich Tvede

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Abstract

In the present paper we show how simple monetary policies can mitigate real effects of credit frictions. We consider stationary overlapping generations economies in which consumers are not equally efficient in producing capital and cannot commit to repay loans. The presence of money in itself does not mitigate the real effects of credit frictions. Equilibrium allocations are generally not Pareto optimal unless the returns on money and capital production are identical for more productive consumers. However, printing money and distributing it to young consumers increases their incomes allowing young more productive consumers to produce more capital. Consequently money printing increases output.
Original languageEnglish
Pages (from-to)31-42
Number of pages12
JournalJournal of Mathematical Economics
Volume87
Early online date15 Jan 2020
DOIs
Publication statusPublished - 1 Mar 2020

Keywords

  • ASSET BUBBLES
  • Financial frictions
  • GROWTH
  • MODEL
  • Monetary policy
  • Overlapping generations economies
  • PURE EXCHANGE

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