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Asset Prices and Monetary Policy$
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John Y. Campbell

Print publication date: 2008

Print ISBN-13: 9780226092119

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226092126.001.0001

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Optimal Monetary Policy with Collateralized Household Debt and Borrowing Constraints

Optimal Monetary Policy with Collateralized Household Debt and Borrowing Constraints

Chapter:
(p.103) 3 Optimal Monetary Policy with Collateralized Household Debt and Borrowing Constraints
Source:
Asset Prices and Monetary Policy
Author(s):

Tommaso Monacelli

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226092126.003.0004

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

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