Incomplete Credit Markets and Monetary Policy

45 Pages Posted: 19 Aug 2015 Last revised: 13 Mar 2019

See all articles by Costas Azariadis

Costas Azariadis

Federal Reserve Banks - Federal Reserve Bank of St. Louis

James Bullard

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Aarti Singh

The University of Sydney - School of Economics

Jacek Suda

Washington University in St. Louis - Department of Economics

Date Written: 2015-05-27

Abstract

We study monetary policy when private credit markets are incomplete. The macroeconomy we study has a large private credit market, in which participant households use non-state contingent nominal contracts (NSCNC). A second, small group of households only uses cash, supplied by the monetary authority, and cannot participate in the credit market. There is an aggregate shock. We find that, despite the substantial heterogeneity, the monetary authority can provide for optimal risk-sharing in the private credit market and thus overcome the NSCNC friction via a counter-cyclical price level rule. The counter-cyclical price level rule is not unique. To pin down a unique monetary policy rule, we consider two secondary goals for the monetary authority, (i) expected inflation targeting and, (ii) nominal GDP targeting. We examine the impact of each of these approaches on the price level rule and other nominal variables in the economy.

Keywords: Monetary policy, incomplete credit markets, non-state contingent nominal contracts, life cycle economies, heterogeneous households, nominal GDP targeting

JEL Classification: E4, E5

Suggested Citation

Azariadis, Costas and Bullard, James and Singh, Aarti and Suda, Jacek, Incomplete Credit Markets and Monetary Policy (2015-05-27). FRB St. Louis Working Paper No. 2015-10. Available at SSRN: https://ssrn.com/abstract=2646149 or http://dx.doi.org/10.20955/wp.2015.010

Costas Azariadis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

James Bullard

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

P.O. Box 442
411 Locust Street
St. Louis, MO 63166
United States
314-444-8576 (Phone)

Aarti Singh

The University of Sydney - School of Economics ( email )

Rm 370 Merewether (H04)
Sydney, NSW 2006 2008
Australia

HOME PAGE: http://sydney.edu.au/arts/economics/staff/academic/aarti_singh.shtml

Jacek Suda

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States

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