IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Inflation Dynamics during the Financial Crisis

Listed author(s):
  • Simon Gilchrist
  • Raphael Schoenle
  • Jae Sim
  • Egon Zakrajšek

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://www.aeaweb.org/articles?id=10.1257/aer.20150248
Download Restriction: no

File URL: https://www.aeaweb.org/articles/attachments?retrieve=TbVJ9kI_nbIEZjAsMtUQNXroo2CDEmSQ
Download Restriction: no

File URL: https://www.aeaweb.org/articles/attachments?retrieve=vRX7uogmGLHYjrH-47QN26GDnDflj34R
Download Restriction: no

File URL: https://www.aeaweb.org/articles/attachments?retrieve=0t5XyhFDCbBc3qVIhbyTslVOhpw5hHkR
Download Restriction: no

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 107 (2017)
Issue (Month): 3 (March)
Pages: 785-823

as
in new window

Handle: RePEc:aea:aecrev:v:107:y:2017:i:3:p:785-823
Note: DOI: 10.1257/aer.20150248
Contact details of provider: Web page: https://www.aeaweb.org/aer/
Email:


More information through EDIRC

Order Information: Web: https://www.aeaweb.org/subscribe.html

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Lawrence J. Christiano & Martin S. Eichenbaum & Mathias Trabandt, 2015. "Understanding the Great Recession," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 110-167, January.
  2. Chirinko, Robert S, 1993. "Business Fixed Investment Spending: Modeling Strategies, Empirical Results, and Policy Implications," Journal of Economic Literature, American Economic Association, vol. 31(4), pages 1875-1911, December.
  3. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  4. Mark Gertler & Simon Gilchrist, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 309-340.
  5. Morten Ravn & Stephanie Schmitt-Grohé & Martín Uribe, 2006. "Deep Habits," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 195-218.
  6. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  7. Gilchrist, Simon & Himmelberg, Charles P., 1995. "Evidence on the role of cash flow for investment," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 541-572, December.
  8. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1998. "Financing Constraints And Inventory Investment: A Comparative Study With High-Frequency Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 513-519, November.
  9. Nilsen, Jeffrey H, 2002. "Trade Credit and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 226-253, February.
  10. Campello, Murillo & Graham, John R. & Harvey, Campbell R., 2010. "The real effects of financial constraints: Evidence from a financial crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 470-487, September.
  11. Fitzgerald, Doireann & Haller, Stephanie & Yedid-Levi, Yaniv, 2016. "How Exporters Grow," Staff Report 524, Federal Reserve Bank of Minneapolis.
  12. Christiano, Lawrence J. & Gust, Christopher & Roldos, Jorge, 2004. "Monetary policy in a financial crisis," Journal of Economic Theory, Elsevier, vol. 119(1), pages 64-103, November.
  13. Murillo Campello & Erasmo Giambona & John R. Graham & Campbell R. Harvey, 2011. "Liquidity Management and Corporate Investment During a Financial Crisis," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1944-1979.
  14. Robert G. King & Mark W. Watson, 2012. "Inflation and Unit Labor Cost," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 111-149, December.
  15. Bassett, William F. & Chosak, Mary Beth & Driscoll, John C. & Zakrajšek, Egon, 2014. "Changes in bank lending standards and the macroeconomy," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 23-40.
  16. Joseph Vavra, 2011. "Inflation Dynamics and Time-Varying Uncertainty: New Evidence and an Ss Interpretation," 2011 Meeting Papers 126, Society for Economic Dynamics.
  17. repec:pri:cepsud:193goldberg is not listed on IDEAS
  18. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory Investment, Internal-Finance Fluctuation, and the Business Cycle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 75-138.
  19. Bhattarai, Saroj & Schoenle, Raphael, 2014. "Multiproduct firms and price-setting: Theory and evidence from U.S. producer prices," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 178-192.
  20. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 541-585.
  21. Pinelopi K. Goldberg & Rebecca Hellerstein, 2009. "How rigid are producer prices?," Staff Reports 407, Federal Reserve Bank of New York.
  22. Robert S. Chirinko, 1992. "Business Fixed Investment Spending: A Critical survey of Modeling Strategies, Empirical Results, and Policy Implications," Working Papers 9213, Harris School of Public Policy Studies, University of Chicago.
  23. Bengt Holmström, 2001. "LAPM: A Liquidity-Based Asset Pricing Model," Journal of Finance, American Finance Association, vol. 56(5), pages 1837-1867, October.
  24. Mark Bils, 1989. "Pricing in a Customer Market," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 699-718.
  25. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 375-394.
  26. Takeshi Kimura, 2013. "Why Do Prices Remain Stable in the Bubble and Bust Period?," International Economic Journal, Taylor & Francis Journals, vol. 27(2), pages 320-320, June.
  27. Chevalier, Judith A & Scharfstein, David S, 1996. "Capital-Market Imperfections and Countercyclical Markups: Theory and Evidence," American Economic Review, American Economic Association, vol. 86(4), pages 703-725, September.
  28. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Is the Phillips Curve Alive and Well after All? Inflation Expectations and the Missing Disinflation," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 197-232, January.
  29. Ravn, Morten O. & Schmitt-Grohe, Stephanie & Uribe, Martín & Uuskula, Lenno, 2010. "Deep habits and the dynamic effects of monetary policy shocks," Journal of the Japanese and International Economies, Elsevier, vol. 24(2), pages 236-258, June.
  30. Raphael Schoenle, 2010. "International Menu Costs and Price Dynamics," Working Papers 79, Brandeis University, Department of Economics and International Businesss School.
  31. Antonio Falato & Dalida Kadyrzhanova & Jae W. Sim, 2013. "Rising intangible capital, shrinking debt capacity, and the US corporate savings glut," Finance and Economics Discussion Series 2013-67, Board of Governors of the Federal Reserve System (U.S.).
  32. Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, 08.
  33. Bart J. Bronnenberg & Jean-Pierre H. Dube & Matthew Gentzkow, 2012. "The Evolution of Brand Preferences: Evidence from Consumer Migration," American Economic Review, American Economic Association, vol. 102(6), pages 2472-2508, October.
  34. Asplund, Marcus & Eriksson, Rickard & Friberg, Richard, 2000. " Price Adjustments by a Gasoline Retail Chain," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(1), pages 101-121, March.
  35. Robert E. Hall, 2008. "General Equilibrium with Customer Relationships: A Dynamic Analysis of Rent-Seeking," 2008 Meeting Papers 312, Society for Economic Dynamics.
  36. Thomas F. Cooley & Vincenzo Quadrini, 2001. "Financial Markets and Firm Dynamics," American Economic Review, American Economic Association, vol. 91(5), pages 1286-1310, December.
  37. Saroj Bhattarai & Gauti B. Eggertsson & Raphael Schoenle, 2012. "Is increased price flexibility stabilizing? Redux," Staff Reports 540, Federal Reserve Bank of New York.
  38. José Manuel Montero & Alberto Urtasun, 2014. "Price-cost mark-ups in the Spanish economy: a microeconomic perspective," Working Papers 1407, Banco de España;Working Papers Homepage.
  39. Mark J. Roberts & Daniel Yi Xu & Xiaoyan Fan & Shengxing Zhang, 2012. "The Role of Firm Factors in Demand, Cost, and Export Market Selection for Chinese Footwear Producers," NBER Working Papers 17725, National Bureau of Economic Research, Inc.
  40. Joseph Vavra, 2014. "Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 215-258.
  41. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 515-539.
  42. Marco Del Negro & Marc P. Giannoni & Frank Schorfheide, 2015. "Inflation in the Great Recession and New Keynesian Models," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 168-196, January.
  43. Matthew Denes & Gauti B. Eggertsson & Sophia Gilbukh, 2013. "Deficits, Public Debt Dynamics and Tax and Spending Multipliers," Economic Journal, Royal Economic Society, vol. 0, pages 133-163, 02.
  44. Hottman, Colin & Redding, Stephen & Weinstein, David E., 2014. "What is 'firm heterogeneity' in trade models? The role of quality, scope, markups and cost," LSE Research Online Documents on Economics 60448, London School of Economics and Political Science, LSE Library.
  45. Alan B. Krueger & Judd Cramer & David Cho, 2014. "Are the Long-Term Unemployed on the Margins of the Labor Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 45(1 (Spring), pages 229-299.
  46. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
  47. François Gourio & Leena Rudanko, 2014. "Customer Capital," Review of Economic Studies, Oxford University Press, vol. 81(3), pages 1102-1136.
  48. repec:pri:cepsud:211schoenle is not listed on IDEAS
  49. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
  50. Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
  51. 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, 08.
  52. Robert B. Barsky & Christopher L. House & Miles S. Kimball, 2007. "Sticky-Price Models and Durable Goods," American Economic Review, American Economic Association, vol. 97(3), pages 984-998, June.
  53. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory (Dis)Investment, Internal Finance Fluctuations, and the Business Cycle," Macroeconomics 9401001, EconWPA.
  54. Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December.
  55. George J. Stigler & James K. Kindahl, 1970. "The Behavior of Industrial Prices," NBER Books, National Bureau of Economic Research, Inc, number stig70-1, November.
  56. Alan B. Krueger & Judd Cramer & David Cho, 2014. "Are the Long-Term Unemployed on the Margins of the Labor Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 229-299.
  57. Kyle Bagwell, 2004. "Countercyclical Pricing in Customer Markets," Economica, London School of Economics and Political Science, vol. 71(284), pages 519-542, November.
  58. Marcela Eslava & James Tybout & David Jinkins & C. Krizan & Jonathan Eaton, 2015. "A Search and Learning Model of Export Dynamics," 2015 Meeting Papers 1535, Society for Economic Dynamics.
  59. Julio J. Rotemberg, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 517-531.
  60. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  61. Asplund, Marcus & Eriksson, Rickard & Strand, Niklas, 2001. "Prices, Margins and Liquidity Constraints: Swedish Newspapers 1990-1996," SSE/EFI Working Paper Series in Economics and Finance 470, Stockholm School of Economics.
  62. Robert J. Gordon, 2013. "The Phillips Curve is Alive and Well: Inflation and the NAIRU During the Slow Recovery," NBER Working Papers 19390, National Bureau of Economic Research, Inc.
  63. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1415-1464.
  64. Yuriy Gorodnichenko & Michael Weber, 2016. "Are Sticky Prices Costly? Evidence from the Stock Market," American Economic Review, American Economic Association, vol. 106(1), pages 165-199, January.
  65. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  66. Gottfries, Nils, 1991. "Customer Markets, Credit Market Imperfections and Real Price Rigidity," Economica, London School of Economics and Political Science, vol. 58(231), pages 317-323, August.
  67. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:107:y:2017:i:3:p:785-823. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros)

or (Michael P. Albert)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.