Lizarazo, Sandra and Da-Rocha, Jose-Maria (2011): Optimal monetary policy and default.
Download (306kB) | Preview
In a context in which individuals might default on their debts and subsequently be excluded from credit markets, holding money helps agents smooth their consumption during periods in which they cannot borrow. Therefore holding money makes the punishment to default less severe. In this context, by affecting money demand, monetary policy can affect incentives to default; determining optimal monetary policy can then be thought of as equivalent to choosing the optimal default rate. Since each economy might have a different optimal default rate, each economy might have a different optimal monetary policy different from the Friedman rule. Specifically, we compare the US to Colombia, using a model with idiosyncratic labor income risk and fiat money. Given differences in enforcement of debt contracts, and differences in income variability and persistence, we find that high inflation is costlier for developing countries compared to developed countries.
|Item Type:||MPRA Paper|
|Original Title:||Optimal monetary policy and default|
|Keywords:||Default, Inflation, Fiat Money, Friedman rule, Endogenous Borrowing Constraints, Precautionary Savings.|
|Subjects:||E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money
|Depositing User:||Sandra Lizarazo|
|Date Deposited:||30. Jun 2011 03:27|
|Last Modified:||30. Dec 2015 19:49|
Aiyagari, S. R. (1994): Uninsured Idiosyncratic Risk and Aggregate Saving, Quarterly Journal of Economics, 109, 659684.
Aiyagari, S. R. and Williamson, S. D. (2000): Money and Dynamic Credit Arrangements Under Private Information Journal of Economic Theory, 91, 248-279.
Akyol, A. (2004): Optimal Monetary Policy in an Economy with Incomplete Credit Markets and Idiosyncratic Risk Journal of Monetary Economics, 51, 1245-1269.
Algan, Y., and Ragot X. (2010): Monetary Policy with Heterogeneous Agents and Borrowing Constraints, Review of Economic Dynamics, 13, 295316.
Bewley, T. F. (1983): A Difficulty with the Optimum Quantity of Money, Econometrica, LI, 14851504.
Bonaldi, P., Gonzales, A., Prada, J., Rodriguez, D. and Rojas, L. (2009): ”Metodo numerico para la calibracion de un modelo DGSE”, Working Paper Departamento de Modelos Macroeconomicos, Banco de la Republica, Febrero 2009.
Bullard, J., and Keating, J., (1995): ”The Long-Run Relationship between Inflation and Output in Poswar Economies”, Journal of Monetary Economics, 36, 477-496.
Bulow, J., and Rogoff, K., (1989): ”A Constant Recontracting Model of Sovereign Debt”, Journal of Political Economy, 97, 155-78.
Campo, J., Parada, J., and, Zuleta, H. (2008): ”Capital natural, capital humano y participacion de los factores. Una revision de los metodos de medicion del crecimiento economico,” Serie de Documentos de Trabajo, Universidad el Rosario, No. 41, Junio 2008.
Chatterjee, S., D. Corbae, M. Nakajima, and J.-V. Rios-Rull (2005): A Quantitative Theory of Unsecured Consumer Credit with Risk of Default,” Federal Reserve Bank of Philadelphia Working Paper 05-18.
Diaz, A. and F. Perera-Tallo (2007): “Credit and Inflation under Borrower’s Lack of Commitment”, Working Paper, Universidad Carlos III, we077946.
Jafarey, S. and P. Rupert (2001): “Limited Commitment, Money, and Credit”, Journal of Economic Theory, 99, 22-58. Livshits, I., J. MacGee, and M. Tertilt (2007): “Consumer Bankruptcy: A Fresh Start,” American Economic Review, 97, 402-418.
Kehoe, T. J., D.K. Levine, and M. Woodford (1992): “The Optimum Quantity of Money Revisited In:” Daspaguta, P., Gale, D., Hart, O., Maskin, E. (Eds.), Economic Analysis of Markets and Games. MIT Press, Cambridge, M.A.
Livshits, I., J. MacGee, and M. Tertilt (2007): “Accounting for the Rise in Consumer Bankruptcies,” Western Ontario Working Paper 05-18.
Parente, S. L., and Prescott, E. C., (2000): Barriers to Riches, Cambridge : MIT Press, 2000.
Zame, W. (1993): Efficiency and the Role of Default When Security Markets are Incomplete, American Economic Review, 83(5), 114264.