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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.

Suggested Citation

  • Magnus Lundin & Nils Gottfries & Charlotte Bucht & Tomas Lindström, 2009. "Price and Investment Dynamics: Theory and Plant‐Level Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(5), pages 907-934, August.
    • Handle: RePEc:wly:jmoncb:v:41:y:2009:i:5:p:907-934
    DOI: 10.1111/j.1538-4616.2009.00238.x
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