Download This PaperSticky Leverage: Comment
29 Pages Posted: 25 Jun 2023 Last revised: 18 Jul 2023
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Sticky Leverage: Comment
Date Written: June 14, 2023
Abstract
We revisit the role of long-term nominal corporate debt for the transmission of inflation shocks in the general equilibrium model of Gomes, Jermann, and Schmid (2016). We show that inaccuracies in the model solution and calibration strategy lead GJS to a model equilibrium in which nominal long-term debt is systematically mispriced. As a result, the quantitative importance of corporate leverage in the transmission of inflation shocks to real activity in their framework is 6 times larger than what arises under the rational expectations equilibrium.
Keywords: Corporate leverage, Nominal long-term debt, Debt overhang, Generalized Euler equation
JEL Classification: E12, E31, E44, E52, G01, G32, G35
Suggested Citation: Suggested Citation
Andrea Ajello
Board of Governors of the Federal Reserve System ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
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Ander Perez-Orive (Contact Author)
Board of Governors of the Federal Reserve System ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
Balint Szoke
Board of Governors of the Federal Reserve System ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States