Sticky Leverage

João Gomes, Urban Jermann and Lukas Schmid

American Economic Review, 2016, vol. 106, issue 12, 3800-3828

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.

JEL-codes: E12 E31 E44 E52 G01 G32 G35 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/aer.20130952
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Citations: View citations in EconPapers (26)

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Working Paper: Sticky Leverage (2014)
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