RSSE Dimitrios P. Tsomocos (University of Oxford) Corporate Legacy Debt, Inflation, and the Efficacy of Monetary Policy

It is our pleasure that prof. Dimitrios P. Tsomocos (University of Oxford) will present on Friday, May 26, 2023, at 12:45 in room RB437 about his research on the topic "Corporate Legacy Debt, Inflation, and the Efficacy of Monetary Policy”.

Registration is not required and anyone who would like to attend is warmly invited.

BIO:  Alongside his role at the SAID Business School, Dimitrios is also a Fellow in Management at St Edmund Hall, University of Oxford. He is also a Senior Research Associate in the Financial Markets Group at the LSE A mathematical economist by trade, his main areas of expertise include - Banking and regulation, Endogenous money, liquidity, and financial instability, Incomplete asset markets, Theoretical asset pricing, Systemic risk, Issues of new financial architecture. Dimitrios’s research has had a substantial impact on economic policy around the world. In particular, he analyses issues of contagion, financial fragility, interbank linkages and the impact of the Basel Accord and financial regulation in the macroeconomy, using a General Equilibrium model with incomplete asset markets, money and endogenous default. He is working towards designing a new paradigm of monetary policy, financial stability analysis and macroprudential regulation. He publishes frequently in leading journals, including Journal of Mathematical Economics, Economic Theory, Journal of Money, Credit and Banking, Journal of Financial Stability, Annals of Finance, International Journal of Central Banking, and Journal of Economics. 

ABSTRACT: We show analytically that the presence of an income effect via the level of corporate debt that affects the monetary policy transmission mechanism by weakening its effect on inflation but strengthening its effect on output. When corporate debt is high but below a threshold, monetary contraction is less effective in controlling inflation. Above this threshold, the income effect generated by corporate debt causes the final consumption good to become a Giffen Good, whereby declines in real wages caused by increases in policy rates increases Aggregate Demand, and raises the price level. This is in spite of equilibrium output declining because of the higher policy rates. In a calibrated dynamic setting we highlight that this mechanism exacerbates the trade-off between inflation and output stabilization beyond the traditional cost channel of monetary policy.