Indebted Supply and Monetary Policy: A Theory of Financial Dominance

Viral Acharya, Guillaume Plantin and Olivier Wang

No 34798, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a New Keynesian model with financial frictions to study how corporate capital structure shapes static and dynamic monetary policy tradeoffs through the supply side. Ex post, when corporate leverage is high, monetary tightening contracts both demand and supply. As a result, the Phillips curve is highly non-linear and state-dependent, and the “natural rate” Rⁿ ensuring price stability increases with corporate leverage. Yet the tradeoff between inflation targeting and tightening supply constraints implies that the optimal ex-post policy is to set a rate Rᵒᵖᵗ

JEL-codes: E31 E32 E43 E44 E52 E58 E61 G32 G38 (search for similar items in EconPapers)
Date: 2026-02
Note: AP CF EFG IFM ME
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