IDEAS home Printed from https://ideas.repec.org/a/kap/atlecj/v47y2019i1d10.1007_s11293-019-09604-x.html
   My bibliography  Save this article

Inflation and the Boom-Bust Cycle in Corporate Leverage

Author

Listed:
  • Brendan Brown

    (Hudson Institute)

Abstract

Financial engineering is an art, not a science. The core of the subject is how to camouflage increases in leverage as the source of raised earnings on equity capital. This article explores how and why demand for financial engineers grows globally under the influence of inflationary U.S. monetary policy and how a boom in their profession contributes importantly to the potentially devastating effect of monetary inflation on economic prosperity. It proceeds to consider the extent to which foreign countries, large or small, would take steps to counter their vulnerability to the financial engineers, with particular reference to the case of the emerging markets and Japan who have experienced at times the maximum impact. Of course, the most effective defense is monetary, but for many reasons detailed here, this has rarely been implemented.

Suggested Citation

  • Brendan Brown, 2019. "Inflation and the Boom-Bust Cycle in Corporate Leverage," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 47(1), pages 25-34, March.
    • Handle: RePEc:kap:atlecj:v:47:y:2019:i:1:d:10.1007_s11293-019-09604-x
    DOI: 10.1007/s11293-019-09604-x
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11293-019-09604-x
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11293-019-09604-x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Inaki Aldasoro & Torsten Ehlers, 2018. "Global liquidity: changing instrument and currency patterns," BIS Quarterly Review, Bank for International Settlements, September.
    2. Merton H. Miller, 1989. "The Modigliani‐Miller Propositions After Thirty Years," Journal of Applied Corporate Finance, Morgan Stanley, vol. 2(1), pages 6-18, March.
    3. Alter, Adrian & Elekdag, Selim, 2020. "Emerging market corporate leverage and global financial conditions," Journal of Corporate Finance, Elsevier, vol. 62(C).
    4. Robert N. McCauley & Patrick McGuire & Vladyslav Sushko, 2015. "Global dollar credit: links to US monetary policy and leverage," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 30(82), pages 187-229.
    5. Sheridan Titman, 2001. "The Modigliani and Miller Theorem and Market Efficiency," NBER Working Papers 8641, National Bureau of Economic Research, Inc.
    6. Bräuning, Falk & Ivashina, Victoria, 2020. "U.S. monetary policy and emerging market credit cycles," Journal of Monetary Economics, Elsevier, vol. 112(C), pages 57-76.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kumhof, Michael & Sokol, Andrej & Rungcharoenkitkul, Phurichai, 2020. "How Does International Capital Flow?," CEPR Discussion Papers 15526, C.E.P.R. Discussion Papers.
    2. Elliott, David & Meisenzahl, Ralf R. & Peydró, José-Luis, 2024. "Nonbank lenders as global shock absorbers: Evidence from US monetary policy spillovers," Journal of International Economics, Elsevier, vol. 149(C).
    3. Bacchetta, Philippe & Cordonier, Rachel & Merrouche, Ouarda, 2023. "The rise in foreign currency bonds: The role of US monetary policy and capital controls," Journal of International Economics, Elsevier, vol. 140(C).
    4. Cavallino, Paolo & Sandri, Damiano, 2023. "The open-economy ELB: Contractionary monetary easing and the trilemma," Journal of International Economics, Elsevier, vol. 140(C).
    5. Hiro Ito & Cesar M. Rodriguez, 2020. "Clamoring for greenbacks: Explaining the resurgence of the U.S. dollar in international debt," International Finance, Wiley Blackwell, vol. 23(3), pages 370-391, December.
    6. Douglas W. Diamond & Yunzhi Hu & Raghuram G. Rajan, 2020. "The Spillovers from Easy Liquidity and the Implications for Multilateralism," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(1), pages 4-34, March.
    7. Stephen G. Cecchetti & Tommaso Mancini-Griffoli & Machiko Narita & Ratna Sahay, 2020. "US or Domestic Monetary Policy: Which Matters More for Financial Stability?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(1), pages 35-65, March.
    8. Abraham,Facundo & Cortina Lorente,Juan Jose & Schmukler,Sergio L., 2020. "Growth of Global Corporate Debt : Main Facts and Policy Challenges," Policy Research Working Paper Series 9394, The World Bank.
    9. Bo Jiang & Tahsin Saadi Sedik, 2019. "The Turning Tide: How Vulnerable are Asian Corporates?," IMF Working Papers 2019/093, International Monetary Fund.
    10. Georgiadis, Georgios & Zhu, Feng, 2021. "Foreign-currency exposures and the financial channel of exchange rates: Eroding monetary policy autonomy in small open economies?," Journal of International Money and Finance, Elsevier, vol. 110(C).
    11. Anni Huang & Narayan Kundan Kishor, 2019. "The rise of dollar credit in emerging market economies and US monetary policy," The World Economy, Wiley Blackwell, vol. 42(2), pages 530-551, February.
    12. Arezki,Rabah & Cho,Caleb Sungwoo & Ha Nguyen & Pham,Anh, 2022. "Corporate Debt and Stock Returns : Evidence from U.S. Firms during the 2020 Oil Crash," Policy Research Working Paper Series 10079, The World Bank.
    13. Inaki Aldasoro & Wenqian Huang & Esti Kemp, 2020. "Cross-border links between banks and non-bank financial institutions," BIS Quarterly Review, Bank for International Settlements, September.
    14. Nina Boyarchenko & Leonardo Elias & Philippe Mueller, 2019. "Corporate Credit Provision," Staff Reports 895, Federal Reserve Bank of New York.
    15. Bacchetta, Philippe & Merrouche, Ouarda, 2015. "Countercyclical Foreign Currency Borrowing: Eurozone Firms in 2007-2009," CEPR Discussion Papers 10927, C.E.P.R. Discussion Papers.
    16. Valérie Revest & Alessandro Sapio, 2012. "Financing technology-based small firms in Europe: what do we know?," Small Business Economics, Springer, vol. 39(1), pages 179-205, July.
    17. Soyoung Kim & Aaron Mehrotra, "undated". "Effects of monetary and macroprudential policies – evidence from inflation targeting economies in the Asia-Pacific region and potential implications for China," GRU Working Paper Series GRU_2016_025, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    18. Disyatat, Piti & Rungcharoenkitkul, Phurichai, 2017. "Monetary policy and financial spillovers: Losing traction?," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 115-136.
    19. Paolo Cavallino & Mr. Damiano Sandri, 2018. "The Expansionary Lower Bound: Contractionary Monetary Easing and the Trilemma," IMF Working Papers 2018/236, International Monetary Fund.
    20. Elif Acar & Gamze Vural & Emin Hüseyin Çetenak, 2020. "Evidence for Financial Hierarchy Theory in Capital Structure Decisions: Data from BIST Companies," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 34(1), pages 29-50.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:atlecj:v:47:y:2019:i:1:d:10.1007_s11293-019-09604-x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.