Working Paper: CEPR ID: DP18385
Authors: Florin Bilbiie; Diego Kanzig
Abstract: Abstract We investigate whether corporate profits can drive elevated inflation through the interplay of income distribution dynamics and aggregate demand—our narrow definition of the “greed” narrative”—within the New Keynesian framework. We first derive an analytical condition for profits to be procyclical and thus inflationary in response to demand expansions. Yet when distributional mechanisms are of the essence, as under the “greed” view, a conundrum emerges: procyclical profits accruing to low-MPC asset-holders imply a dampening of aggregate demand, yielding deflationary forces—the opposite of “greedflation”. Adding capital investment undoes part of this as it delivers aggregate-demand amplification even under procyclical profits, but the deflationary effects of the latter are still operating in a compensating way. Countercyclical income risk can deliver the amplified inflationary response; yet since this operates through a precautionary-saving channel and not profits, it is still inconsistent with the narrative directly attributing inflation to corporate greed.
Keywords: aggregate demand; inflation; profits; income distribution
JEL Codes: D11; E32; E52; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in demand (J23) | Procyclical profits (E32) |
| Increase in demand (J23) | Inflation (E31) |
| Increase in demand + Wages stickier than prices (J39) | Procyclical profits and inflation (E32) |
| Supply shocks (E39) | Negative comovement between profits and inflation (E31) |
| Profits countercyclical or procyclical + High MPC households (E32) | Aggregate demand amplification (E00) |
| Procyclical profits (E32) | Significant aggregate demand amplification through investment channels (E22) |
| Procyclical profits (E32) | Amplification of inflation (E31) |