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  4. December 2016
  5. Sticky Leverage

òòò½Íø Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Sticky Leverage

  • João Gomes
  • Urban Jermann
  • Lukas Schmid
òòò½Íø Review
vol. 106, no. 12, December 2016
(pp. 3800–3828)
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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.

Citation

Gomes, João, Urban Jermann, and Lukas Schmid. 2016. "Sticky Leverage." òòò½Íø Review 106 (12): 3800–3828. DOI: 10.1257/aer.20130952

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
  • E31 Price Level; Inflation; Deflation
  • E44 Financial Markets and the Macroeconomy
  • E52 Monetary Policy
  • G01 Financial Crises
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • G35 Payout Policy