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Why Do Prices Remain Stable in the Bubble and Bust Period?

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  • Takeshi Kimura

Abstract

In spite of a large swing in real output growth in the bubble and bust period, aggregate prices remained relatively stable in Japan. Empirical results show that such price rigidity can be explained by the customer market model combined with financial constraints. The degree of financial constraints that firms face in the bubble and bust period fluctuates significantly, and the impact of financial positions on firms' prices is counter-cyclical. In booms, liquidity-abundant firms invest in market share by keeping prices down, while in a recession financially constrained firms charge a high price to locked-in customers who remain loyal. Such counter-cyclicality is clearly observed in the pricing behavior of large firms that produce differentiated goods. In contrast, small firms whose product brand is not well established in the market cannot lock in customers, and hence financial constraints do not affect their pricing decisions.

Suggested Citation

  • Takeshi Kimura, 2013. "Why Do Prices Remain Stable in the Bubble and Bust Period?," International Economic Journal, Taylor & Francis Journals, vol. 27(2), pages 157-177, June.
  • Handle: RePEc:taf:intecj:v:27:y:2013:i:2:p:157-177
    DOI: 10.1080/10168737.2012.719918
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    References listed on IDEAS

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    1. Adam S. Posen, 2010. "The Realities and Relevance of Japan’s Great Recession: Neither Ran nor Rashomon," Working Paper Series WP10-7, Peterson Institute for International Economics.
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    Cited by:

    1. 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.
    2. 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.

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