Corporate Legacy Debt, Inflation, and the Efficacy of Monetary Policy

Charles A.E. Goodhart, M. Udara Peiris, Dimitrios Tsomocos and Xuan Wang
Additional contact information
Charles A.E. Goodhart: Financial Markets Group, London School of Economics and CEPR
M. Udara Peiris: Oberlin College
Xuan Wang: Vrije Universiteit Amsterdam and Tinbergen Institute

No 24-071/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We investigate how corporate legacy debt, through heterogeneous household portfolios, affects monetary policy’s ability to control inflation. We find that (1) corporate debt generates an income effect that counters the traditional substitution effect, reducing the effectiveness of rate changes on inflation; (2) higher corporate debt exacerbates the trade-off between output and inflation stabilization. The income is positive on aggregate demand and inflation despite declining output. Local projections using U.S. monetary policy shocks show that over six quarters the cumulative difference in output and inflation for high and low corporate debt-to-household asset ratios is 3 percent and 1.2 percent.

Keywords: Household heterogeneity; Inflation; Monetary policy; Corporate debt; Giffen good (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 G11 (search for similar items in EconPapers)
Date: 2024-11-26
New Economics Papers: this item is included in nep-cba, nep-mon and nep-pke
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Related works:
Working Paper: Corporate Legacy Debt, Inflation, and the Efficacy of Monetary Policy (2022)
Working Paper: Corporate legacy debt, inflation, and the efficacy of monetary policy (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20240071

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