Markus Althanns (ETH Zurich) will present “Strategic Debt in a Monetary Economy” on February 21th, 2025, at 11:00 AM, in room QA406.
Abstract:
We analyze in a general-equilibrium framework how producers improve their bargaining position vis-à-vis consumers through debt. By indebting themselves, producers compel consumers in bilateral matches to partially bear their debt burden. Consumers who attach little value to producers’ goods are not willing to do so, so that some bilateral matches fail to result in trade. Producers account for this extensive-margin channel, but only to the extent that it affects themselves; they ignore the negative effect on consumers. A Pigouvian tax on debt resolves this externality and, in its absence, monetary policy mitigates the externality by deviating from the Friedman rule. We calibrate the model to U.S. data and quantify optimal nominal interest rates at levels up to 0.5 percent. Although there is ample empirical evidence for the use of debt to leverage bargaining power, we show that there are better contracts to achieve this.