Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/229488
Authors: 
Nuño, Galo
Thomas, Carlos
Year of Publication: 
2020
Series/Report no.: 
CESifo Working Paper No. 8670
Abstract: 
We analyze optimal monetary policy under commitment in an economy with uninsurable idiosyncratic risk, long-term nominal bonds and costly inflation. Our model features two transmission channels of monetary policy: a Fisher channel, arising from the impact of inflation on the initial price of long-term bonds, and a liquidity channel. The Fisher channel gives the central bank a reason to inflate for redistributive purposes, because debtors have a higher marginal utility than creditors. This inflationary motive fades over time as bonds mature and the central bank pursues a deflationary path to raise bond prices and thus relax borrowing limits. The result is optimal inflation front-loading. Numerically, we find that optimal policy achieves first-order consumption and welfare redistribution vis-à-vis a zero inflation policy.
Subjects: 
optimal monetary policy
incomplete markets
Gâteau derivative
nominal debt
inflation
redistributive effects
continuous time
JEL: 
E50
E62
F34
Document Type: 
Working Paper

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