Giovannetti, Giorgia: Nominal Debt as a Burden to Monetary Policy
World Conference Econometric Society, 2000, Seattle

Giorgia Giovannetti, Universita di Firenze and European University Institute
Ramon Marimon, European University Institute, Ministry of Science and Technology, Universitat Pompeu Fabra, CEPR and NBER
Pedro Teles, Banco de Portugal and Universidade Catolica Portuguesa
Nominal Debt as a Burden to Monetary Policy
Session: C-3-7  Saturday 12 August 2000  by Giovannetti, Giorgia
We study a dynamic equilibrium model where the same optimal monetary policy is implemented with and without full commitment if government debt is indexed. In contrast, with nominal debt, the full commitment policy is time inconsistent, since the government is tempted to inflate away its nominal liabilities. We characterize the optimal sequential policy. It has the feature that government debt is progressively depleted, and so, eventually, the time inconsistency problem vanishes. We compare this equilibrium to a myopic solution and to the Ramsey solution.
Submitted paper full-text in .pdf

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