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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.

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:mcb:jmoncb:v:41:y:2009:i:5:p:907-934
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    Cited by:

    1. 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.
    2. Simon Gilchrist & Raphael Schoenle & Jae Sim & Egon Zakrajšek, 2017. "Inflation Dynamics during the Financial Crisis," American Economic Review, American Economic Association, vol. 107(3), pages 785-823, March.
    3. Angelo Secchi & Federico Tamagni & Chiara Tomasi, 2011. "Exporting under financial constraints: margins, switching dynamics and prices," LEM Papers Series 2011/24, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    4. Ioana A. Duca & José M. Montero & Marianna Riggi & Roberta Zizza, 2017. "I will survive. Pricing strategies of financially distressed firms," Temi di discussione (Economic working papers) 1106, Bank of Italy, Economic Research and International Relations Area.
    5. Canova, Fabio & Sala, Luca, 2006. "Back to square one: identification issues in DSGE models," Working Paper Series 583, European Central Bank.
    6. Angelo Secchi & Federico Tamagni & Chiara Tomasi, 2016. "Export price adjustments under financial constraints," Canadian Journal of Economics, Canadian Economics Association, vol. 49(3), pages 1057-1085, August.
    7. Canova, Fabio & Sala, Luca, 2009. "Back to square one: Identification issues in DSGE models," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 431-449, May.
    8. Söderberg, Johan, 2011. "Customer markets and the welfare effects of monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 206-219.
    9. Leena Rudanko & Francois Gourio, 2011. "Customer capital and the business cycle," 2011 Meeting Papers 120, Society for Economic Dynamics.

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