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Inflation and Default Dynamics

Inflation and Default Dynamics Abstract Changes in inflation, particularly if they are sharp, can have important consequences for nominal contracts, especially debt instruments such as fixed-rate bonds. This paper examines the intricate dynamics of inflation and defaults. The experience of the United States during the past four decades is subjected to empirical analysis to examine how the nature of the relationship changed as we shifted from a high inflation to a low inflation regime. The paper is organized as a three-part study. We initially examine the U.S. default experience, as summarized in Moody's speculative grade default rate, along with industry differences. The paper then scrutinizes U.S. inflation dynamics as seen in different summary measures of the general price level and delves into pricing power issues. The study proceeds to examine co-movements in the inflation and default series from a theoretical and empirical standpoint and the results confirm the intuitive postulate: higher the inflation rate, the more pricing power companies have; greater pricing power leads to, better earnings and repayment abilities for firms and a lower incidence of defaults. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Business Economics Springer Journals

Inflation and Default Dynamics

Business Economics , Volume 45 (3): 13 – Jul 1, 2010

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References (22)

Publisher
Springer Journals
Copyright
2010 National Association for Business Economics
ISSN
0007-666X
eISSN
1554-432X
DOI
10.1057/be.2010.16
Publisher site
See Article on Publisher Site

Abstract

Abstract Changes in inflation, particularly if they are sharp, can have important consequences for nominal contracts, especially debt instruments such as fixed-rate bonds. This paper examines the intricate dynamics of inflation and defaults. The experience of the United States during the past four decades is subjected to empirical analysis to examine how the nature of the relationship changed as we shifted from a high inflation to a low inflation regime. The paper is organized as a three-part study. We initially examine the U.S. default experience, as summarized in Moody's speculative grade default rate, along with industry differences. The paper then scrutinizes U.S. inflation dynamics as seen in different summary measures of the general price level and delves into pricing power issues. The study proceeds to examine co-movements in the inflation and default series from a theoretical and empirical standpoint and the results confirm the intuitive postulate: higher the inflation rate, the more pricing power companies have; greater pricing power leads to, better earnings and repayment abilities for firms and a lower incidence of defaults.

Journal

Business EconomicsSpringer Journals

Published: Jul 1, 2010

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