Debt Constraints and Monetary Policy

Posted: 21 Feb 2020

See all articles by Diemo Dietrich

Diemo Dietrich

Newcastle University Business School

Jong Kook Shin

Korea University - Sejong Campus

Mich Tvede

University of East Anglia

Date Written: January 15, 2020

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 increase their incomes allowing young more productive consumers to produce more capital. Consequently money printing increases output.

Keywords: financial frictions, monetary policy, overlapping generations economies

JEL Classification: D5, E4, E5

Suggested Citation

Dietrich, Diemo and Shin, Jong Kook and Tvede, Mich, Debt Constraints and Monetary Policy (January 15, 2020). Journal of Mathematical Economics, Vol. 87, 2020 DOI:10.1016/j.jmateco.2019.12.004, Available at SSRN: https://ssrn.com/abstract=3525014

Diemo Dietrich

Newcastle University Business School ( email )

5 Barrack Road
Newcastle-upon-Tyne NE1 7RU, NE1 4SE
United Kingdom

HOME PAGE: http://www.ncl.ac.uk/business-school/staff/profile/diemodietrich.html

Jong Kook Shin

Korea University - Sejong Campus ( email )

Sejong
Korea, Republic of (South Korea)

Mich Tvede (Contact Author)

University of East Anglia ( email )

Norwich Research Park
Norwich, Norfolk NR4 7TJ
United Kingdom

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