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Price and Investment Dynamics: Theory and Plant-Level Data

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  • MAGNUS LUNDIN
  • NILS GOTTFRIES
  • CHARLOTTE BUCHT
  • TOMAS LINDSTRÖM

Abstract

We construct a model of a firm competing for market share in a customer market and making investments in physical capital. The firm is financially constrained and there are implementation lags in investment. Our model predicts that product prices should depend on costs and competitors' prices but respond weakly to demand shocks. Also, prices should be strongly related to investment. We estimate price and investment equations on panel data for Swedish manufacturing plants and find results that are qualitatively in line with these predictions, though the relation between investment and prices is stronger than predicted by our model. Copyright (c) 2009 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 41 (2009)
Issue (Month): 5 (08)
Pages: 907-934

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Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:5:p:907-934

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Fabio Canova & Luca Sala, 2005. "Back to square one: Identification issues in DSGE models," Economics Working Papers 927, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2006.
  2. Angelo Secchi & Federico Tamagni & Chiara Tomasi, 2013. "Export price adjustments under financial constraints," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00848159, HAL.
  3. Mikael Carlsson & Stefan Eriksson & Nils Gottfries, 2013. "Product market imperfections and employment dynamics," Oxford Economic Papers, Oxford University Press, vol. 65(2), pages 447-470, April.
  4. Söderberg, Johan, 2011. "Customer markets and the welfare effects of monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 206-219.
  5. Angelo Secchi & Federico Tamagni & Chiara Tomasi, 2012. "Exporting under Financial Constraints: Margins, Switching Dynamics and Prices," Development Working Papers 338, Centro Studi Luca d\'Agliano, University of Milano, revised 16 Jul 2012.
  6. Leena Rudanko & Francois Gourio, 2011. "Customer capital and the business cycle," 2011 Meeting Papers 120, Society for Economic Dynamics.

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