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American Economic Review Vol. 107 No. 3 2017

Inflation Dynamics during the Financial Crisis

Simon Gilchrist1; Raphael Schoenle2; Jae Sim3; Egon Zakrajšek4

1 Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215, and NBER (e-mail: ) · 2 Department of Economics and International Business School, Brandeis University, 415 South Street, Waltham, MA 02454 (e-mail: ) · 3 Division of Research and Statistics, Federal Reserve Board, 20th Street and Constitution Avenue NW, Washington, DC 20551 (e-mail: ) · 4 Division of Monetary Affairs, Federal Reserve Board, 20th Street and Constitution Avenue NW, Washington, DC 20551 (e-mail: )

open access

Abstract

Using a novel dataset, which merges good-level prices underlying the PPI with the respondents' balance sheets, we show that liquidity constrained firms increased prices in 2008, while their unconstrained counterparts cut prices. We develop a model in which firms face financial frictions while setting prices in customer markets. Financial distortions create an incentive for firms to raise prices in response to adverse financial or demand shocks. This reaction reflects the firms' decisions to preserve internal liquidity and avoid accessing external finance, factors that strengthen the countercyclical behavior of markups and attenuate the response of inflation to fluctuations in output.

DOI
10.1257/aer.20150248
Volume
107
Issue
3
Pages
785-823
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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