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Greed? Profits, Inflation, and Aggregate Demand

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  • Florin O. Bilbiie
  • Diego R. Känzig

Abstract

We investigate the interplay of corporate profits and income distribution in shaping inflation and aggregate demand within the New Keynesian framework. We derive an analytical condition for profits to be procyclical and inflationary. The profit cyclicality is a key determinant of the model’s propagation properties under household heterogeneity, but for aggregate-demand fluctuations to be amplified by heterogeneity, profits have to be countercyclical—an implication at odds with the data. When adding capital investment, there can be aggregate-demand amplification under procyclical profits but it works through an investment channel and not profits, inconsistent with the narrative attributing inflation to corporate greed.

Suggested Citation

  • Florin O. Bilbiie & Diego R. Känzig, 2023. "Greed? Profits, Inflation, and Aggregate Demand," NBER Working Papers 31618, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31618
    Note: EFG ME
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    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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