The irrelevance of some forms of credit constraints for government monetary and debt policy

Abstract

Some economists have pointed to credit constraints as possible explanations for two phenomena. First, credit constraints could explain violations of Ricardian equivalence. Second, constraints could also provide a mechanism through which monetary policy could affect the real economy independent of effects on interest rates. Hayashi (1986) shows that some types of credit constraints do not necessarily imply a violation of Ricardian equivalence. Similarly, this paper finds that the effects of government monetary and debt policies in an economy characterized by credit constraints can be similar to those in a model without constraints.