Journal of Advances in Economics and Finance

Long-Term Financial Contracts in an Endowment Economy of the Eggertsson-Krugman Model

Download PDF (245.8 KB) PP. 221 - 229 Pub. Date: November 7, 2017

DOI: 10.22606/jaef.2017.24002

Author(s)

Avner Bar-Ilan^*
Department of Economics University of Haifa
Yasmin Peled
Department of Economics University of Haifa

Abstract

This paper extends the endowment economy model of Eggertsson and Krugman (2012) by allowing for various durations of financial contracts. This extension might change the way that monetary policy affects the economy. Lower nominal interest rate appreciates the real value of outstanding long term debt and forces indebted consumers to cut their consumption. This contractionary effect partially offsets the standard expansionary effect of low interest rates. Longer financial contracts make this unconventional offsetting larger. The expansionary effect of commitment to future inflation, on the other hand, does not depend on the length of financial contracts.

Keywords

Deleveraging, debt deflation, monetary policy.

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