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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 ambiguou...
Contexts in source publication
Context 1
... the latter assumption implies that the borrower will be in a steady state in all periods t ≥ 0 with s b,t = −γ y regardless of the inflation rate. Figure 1 shows the effects of the inflation rate π and the parameter γ on borrower's consumption share c b,t /y and welfare for the period t = 0 and t > 0. The corresponding effects on lenders are shown in Figure A.1 in Appendix A.3. ...
Context 2
... consumption share c b,t /y and welfare of borrowers unambiguously increase with the inflation rate, in accordance with the effects described above. The second column of Figure 1 displays the effects of changes in the fraction γ at a constant inflation rate π . A reduction of γ has a positive impact on borrowers' consumption share in t > 0 by lowering debt (see solid line), which qualitatively accords to the impact of a higher inflation rate. ...
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