Sticky Leverage
João Gomes, Urban Jermann, Lukas Schmid
American Economic Review · 2016 · Volume 106 · Issue 12
Abstract
We develop a tractable general equilibrium model that captures the interplay between nominal long-term corporate debt, inflation, and real aggregates. We show that unanticipated inflation changes the real burden of debt and, more significantly, leads to a debt overhang that distorts future investment and production decisions. For these effects to be both large and very persistent, it is essential that debt maturity exceeds one period. We also show that interest rate rules can help stabilize our economy.
Keywords
General Aggregative Models: Keynes, Keynesian, Post-Keynesian, Price Level, Inflation, Deflation, Financial Markets and the Macroeconomy, Monetary Policy, Financial Crises, Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill, Payout Policy
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