Overaccumulation,Interest, and Prices |
| |
| Authors: | CHRISTOPHER M. GUNN |
| |
| Abstract: | I use a financial accelerator model to study interest and prices under boom–busts driven by changes in expectations about total factor productivity (TFP) and credit. I show that inflation falls in the boom phase of the TFP episode and then recovers during the bust, yet rises in the boom phase of the credit episode and then falls during the bust. Furthermore, for both episodes, the overaccumulation of debt relative to capital during the boom is critical for the busts since it implies a fall in credit worthiness. Finally, I show that stricter inflation targeting reduces inefficiencies in all instances but the boom phase of the TFP episode. |
| |
| Keywords: | E31 E32 E44 E52 expectations‐driven business cycle boom– bust news shock monetary policy overaccumulation inflation financial accelerator Great Recession debt New Keynesian |
|
|
