Corporate legacy debt, inflation, and the efficacy of monetary policy

C. A. E. Goodhart, Udara Peiris, Dimitrios Tsomocos and Xuan Wang

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The COVID-19 pandemic has coincided with a rapid increase in indebtedness. Although the rise in public debt and its policy implications have received much attention recently, the rise in corporate debt has received less so. We argue that high levels of corporate debt may impede the transmission mechanism of monetary policy and make it less effective in controlling inflation. In an environment with working capital financing requirements, when firms’ indebtedness is sufficiently high, the income effect of higher nominal interest rates offsets or even dominates its usual negative substitution effect on aggregate demand and is quantitatively important. This mechanism is independent of standard financial and nominal frictions and enhances the trade-off between inflation and output stabilisation.

Keywords: coronavirus; covid-19 (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 G33 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2021-12-10
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://eprints.lse.ac.uk/112955/ Open access version. (application/pdf)

Related works:
Working Paper: Corporate Legacy Debt, Inflation, and the Efficacy of Monetary Policy (2024)
Working Paper: Corporate Legacy Debt, Inflation, and the Efficacy of Monetary Policy (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:112955

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