Optimal Monetary Policy with Collateralized Household Debt and Borrowing Constraints

Tommaso Monacelli

in Asset Prices and Monetary Policy

Published by University of Chicago Press

Published in print October 2008 | ISBN: 9780226092119
Published online February 2013 | e-ISBN: 9780226092126 | DOI:
Optimal Monetary Policy with Collateralized Household Debt and Borrowing Constraints

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This chapter lays out a framework for the analysis of optimal monetary policy in the presence of nominal private debt and of a collateral constraint on borrowing. The emergence of a borrowing-lending decision in the equilibrium of our economy requires heterogeneity between a patient and an impatient agent. At the margin, and relative to a standard representative agent economy with price stickiness, optimal policy in this context requires a partial use of inflation volatility with a redistributive motive. However, the fact that, due to the presence of price stickiness, inflation movements are costly heavily biases the optimal policy prescription toward low inflation volatility. When durable prices have the additional effect of altering the value of the collateral and in turn the ability of borrowing, optimal policy has a motive for partially stabilizing the relative price of durables.

Keywords: monetary policy; private debt; collateral constraint; borrowing; inflation

Chapter.  14152 words.  Illustrated.

Subjects: Macroeconomics and Monetary Economics

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