Working Paper: NBER ID: w22827
Authors: Simon Gilchrist; Raphael Schoenle; Jae Sim; Egon Zakrajek
Abstract: Using a novel dataset, which merges good-level prices underlying the PPI with the respondents’ balance sheets, we show that liquidity constrained firms increased prices in 2008, while their unconstrained counterparts cut prices. We develop a model in which firms face financial frictions while setting prices in customer markets. Financial distortions create an incentive for firms to raise prices in response to adverse financial or demand shocks. This reaction reflects the firms’ decisions to preserve internal liquidity and avoid accessing external finance, factors that strengthen the countercyclical behavior of markups and attenuate the response of inflation to fluctuations in output.
Keywords: Inflation; Financial Crisis; Pricing Behavior; Liquidity Constraints
JEL Codes: E31; E32; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial constraints (H60) | pricing behavior (D40) |
| liquidity constrained firms (G33) | increase prices (D49) |
| liquidity unconstrained firms (G33) | decrease prices (E31) |
| financial distortions (F65) | raise prices (D49) |
| weak balance sheets (G32) | diverging pricing behavior (D49) |
| financial frictions (G19) | countercyclical behavior of markups (E32) |
| liquidity positions (G33) | pricing strategies (D49) |