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Price and investment dynamics: theory and plant level data

  • Charlotte Bucht
  • Nils Gottfries
  • Tomas Lindström
  • Magnus Lundin

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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Article provided by Board of Governors of the Federal Reserve System (U.S.) in its journal Proceedings.

Volume (Year): (2005)
Issue (Month): ()
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Handle: RePEc:fip:fedgpr:y:2005:x:23
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