Sticky Leverage: Comment

Ajello, Andrea; Pérez-Orive, Ander; Szőke, Bálint

doi:10.17016/FEDS.2023.051

Working Paper

Sticky Leverage: Comment

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, henceforth GJS). 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;

https://doi.org/10.17016/FEDS.2023.051