Creating a Fed safety net for borrowers

From Debt and Incomplete Financial Markets: A Case for Nominal GDP Targeting:

Financial markets are incomplete, thus for many households borrowing is possible only by accepting a financial contract that specifes a fixed repayment. However, the future income that will repay this debt is uncertain, so risk can be ineciently distributed. This paper argues that a monetary policy of nominal GDP targeting can improve the functioning of incomplete financial markets when incomplete contracts are written in terms of money. By insulating households’ nominal incomes from aggregate real shocks, this policy effectively completes financial markets by stabilizing the ratio of debt to income. The paper argues the objective of replicating complete financial markets should receive substantial weight even in an environment with other frictions that have been used to justify a policy of strict inflation targeting.


Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas

3 thoughts on “Creating a Fed safety net for borrowers

  1. From business risk and from conservative accounting standpoints, the economic liberals at Brookings are all wet. Private lenders cannot print money, as the friends of Brookings can do, so proposing any loosening of contractual loan language can leave bankers up a creek without a paddle.

    Remember 2008? All we need right now is another bubble and Oops! – there goes a billion-kilowatt dam.

  2. When anything goes wrong, hand out more money. We print it in the back room, cheap. Help the debtors and smite the lenders. If they don’t like this, then they should lend less next time. Anyway, they aren’t of our party. As an economist, I measure the benefits, but I really don’t think that there any costs.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>