Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/307427 
Year of Publication: 
2024
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2024-071/VI
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
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.
Subjects: 
Household heterogeneity
Inflation
Monetary policy
Corporate debt
Giffen good
JEL: 
E31
E32
E52
G11
G51
Document Type: 
Working Paper

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