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  3. American Economic Review
  4. December 2016
  5. Sticky Leverage

Sticky Leverage

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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.

Citation

Gomes, João, Urban Jermann, and Lukas Schmid. 2016. "Sticky Leverage." American Economic Review, 106 (12): 3800-3828. DOI: 10.1257/aer.20130952

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
  • E31 Price Level; Inflation; Deflation
  • E44 Financial Markets and the Macroeconomy
  • E52 Monetary Policy
  • G01 Financial Crises
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • G35 Payout Policy