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

Charles A.E. Goodhart, Udara Peiris, Dimitrios Tsomocos and Xuan Wang
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Charles A.E. Goodhart: London School of Economics
Xuan Wang: Vrije Universiteit Amsterdam

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

Abstract: We posit that corporate legacy debt limits monetary policy’s effect on inflation because households are heterogeneous: some hold that debt and supply labor to firms, while others own corporate equity. When policy is contractionary, the debt creates an income effect for the households, which dampens the decline in aggregate demand and flattens the aggregate supply curve. This weakens the disinflationary effect of policy and reduces output, worsening the inflation-output trade-off. We provide empirical evidence consistent with the model’s predictions.

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, Revised 2025-05-22
New Economics Papers: this item is included in nep-ban, 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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