Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2024-11-26
Number: 24-071/VI
Author-Name: Charles A.E. Goodhart
Author-Workplace-Name: Financial Markets Group, London School of Economics and CEPR
Author-Name: M. Udara Peiris
Author-Workplace-Name: Oberlin College
Author-Name: Dimitrios P. Tsomocos
Author-Workplace-Name: Saïd Business School and St. Edmund Hall, University of Oxford
Author-Name: Xuan Wang
Author-Workplace-Name: Vrije Universiteit Amsterdam and Tinbergen Institute
Title: Corporate Legacy Debt, Inflation, and the Efficacy of Monetary Policy
Abstract: We investigate how corporate legacy debt, through heterogeneous household portfolios, affects monetary policy’s ability to control inflation. We find that (1) corporate debt generates an income effect that counters the traditional substitution effect, reducing the effectiveness of rate changes on inflation; (2) higher corporate debt exacerbates the trade-off between output and inflation stabilization. The income is positive on aggregate demand and inflation despite declining output. Local projections using U.S. monetary policy shocks show that over six quarters the cumulative difference in output and inflation for high and low corporate debt-to-household asset ratios is 3 percent and 1.2 percent.
Classification-JEL: E31, E32, E52, G11
Keywords: Household heterogeneity, Inflation, Monetary policy, Corporate debt, Giffen good
File-URL: https://papers.tinbergen.nl/24071.pdf
File-Format: application/pdf
File-Size: 2.374.792 bytes
Handle: RePEc:tin:wpaper:20240071