Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/191416 
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper No. 7391
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We develop an asset-pricing model with endogenous corporate policies that explains how inflation jointly impacts real asset prices and corporate default risk. Our model includes two empirically grounded nominal frictions: fixed nominal coupons and sticky profitability. Taken together, these two frictions result in higher real equity prices and credit spreads when inflation falls. An increase in inflation has opposite effects, but with smaller magnitudes. In the cross section, the model predicts the negative impact of inflation on real equity values is stronger for low leverage firms. We find empirical support for the model predictions.
Subjects: 
low inflation
default risk
equity
leverage
credit spreads
JEL: 
E44
G12
G32
G33
Document Type: 
Working Paper
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