Sticky Leverage

Gomes, Joao F.; Jermann, Urban J.; Schmid, Lukas

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Sticky Leverage

The Wharton School Research Paper No. 52

44 Pages Posted: 29 May 2013 Last revised: 11 May 2016

See all articles by Joao F. Gomes

Urban J. Jermann

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Lukas Schmid

University of Southern California - Marshall School of Business

Date Written: October 14, 2014

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.

Keywords: Debt deflation, debt overhang, monetary non-neutrality

Suggested Citation: Suggested Citation

Gomes, João F. and Jermann, Urban J. and Schmid, Lukas, Sticky Leverage (October 14, 2014). The Wharton School Research Paper No. 52, Available at SSRN: https://ssrn.com/abstract=2271470