Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/222337 
Year of Publication: 
2020
Series/Report no.: 
ECONtribute Discussion Paper No. 011
Publisher: 
University of Bonn and University of Cologne, Reinhard Selten Institute (RSI), Bonn and Cologne
Abstract: 
This paper examines how financial constraints affect redistribution via monetary policy. We explore a novel mechanism of monetary non-neutrality, which is based on debt limits imposed in nominal terms. Specifically, when debt is constrained by current income, monetary policy can alter the real terms of borrowing. Changes in inflation exert ambiguous effects, depending on the initial debt/wealth position and the willingness to borrow. We show analytically that borrowers can benefit from increased debt limits under lower inflation rates. This novel effect can dominate conventional debt deflation effects. We find that particularly less indebted borrowers as well as potential future borrowers gain and that aggregate welfare can be enhanced under a permanent reduction in inflation.
Subjects: 
Monetary policy
redistribution
borrowing limits
non-state contingent nominal debt
heterogeneous agents
JEL: 
D52
E44
E52
Document Type: 
Working Paper

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