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Financial Market Imperfections and the Pricing Decision of Firms: Theory and Evidence

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  • Balleer, Almut
  • Hristov, Nikolay
  • Kleemann, Michael
  • Menno, Dominik

Abstract

This paper investigates how financial market imperfections and nominal rigidities interact. Based on new firm-level evidence for Germany, we document that financially constrained firms adjust prices more often than their unconstrained counterparts. In particular, financially constrained firms do not only increase prices, but also decrease prices more often. We show that these empirical patterns are consistent with a partial equilibrium menu-cost model with financial frictions. Our results suggest that tighter financial constraints are associated with higher nominal rigidities, higher prices and lower output. Furthermore, financial recessions may induce very different dynamics than normal recessions if the relative size of unexpected financial shocks is large relative to aggregate price shocks.

Suggested Citation

  • Balleer, Almut & Hristov, Nikolay & Kleemann, Michael & Menno, Dominik, 2015. "Financial Market Imperfections and the Pricing Decision of Firms: Theory and Evidence," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113054, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc15:113054
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    File URL: https://www.econstor.eu/bitstream/10419/113054/1/VfS_2015_pid_723.pdf
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    Cited by:

    1. Ahrens, Steffen & Pirschel, Inske & Snower, Dennis J., 2017. "A theory of price adjustment under loss aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 78-95.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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