reasonable amount of aggregate volatility.

We examine the effects of long-lived nominal debt contracts in a quantitative business cycle model with financial frictions. In our setting, as in reality, firms fund themselves with a mix of nominal defaultable debt and equity securities to issue in every period. Debt is priced fairly taking...

In this paper we investigate the theoretical relation between financial leverage and stock returns in a dynamic world where both the corporate investment and financing decisions are endogenous. We find that the link between leverage and stock returns is more complex than the static textbook...

We develop a tractable general equilibrium model that captures the interplay between nominal long-term corporate debt, inflation, and real aggregates. We show that unanticipated inflation changes the real burden of debt and, more significantly, leads to a debt overhang that distorts future...