Strategic Debt in a Monetary Economy
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Author / Producer
Date
2025-05
Publication Type
Working Paper
ETH Bibliography
yes
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Abstract
Producers can leverage their bargaining power vis-à-vis consumers by entering bargaining with debt. We discover novel general-equilibrium effects of such strategic debt by developing a money-search framework featuring heterogeneous consumers. Debt distorts trade along two margins: it destroys matches with low-preference consumers and it tightens liquidity constraints within matches. While the fiscal authority can fully eliminate strategic debt through taxation, in its absence, monetary policy can partially curb it by deviating from the Friedman rule—raising nominal rates up until 0.51%. Finally, we show that producers can leverage their bargaining power even more effectively with contracts different from debt.
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published
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Journal / series
Volume
524
Pages / Article No.
Publisher
KOF Swiss Economic Institute, ETH Zurich
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Edition / version
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Date collected
Date created
Subject
Bargaining; money search; strategic debt
Organisational unit
02525 - KOF Konjunkturforschungsstelle / KOF Swiss Economic Institute
06338 - KOF FB KOF Lab / KOF FB KOF Lab