Working Paper: NBER ID: w31618
Authors: Florin O. Bilbiie; Diego R. Knzig
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: corporate profits; inflation; aggregate demand; New Keynesian framework
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 |
|---|---|
| corporate profits (G35) | inflation (E31) |
| demand shocks (E39) | corporate profits (G35) |
| demand shocks (E39) | inflation (E31) |
| corporate profits (G35) | aggregate demand amplification (E00) |
| household heterogeneity (D19) | countercyclical profits (E32) |
| cyclicality of profits (E32) | inflation (E31) |
| wage stickiness (J31) | cyclicality of profits (E32) |
| profits (L21) | inflation response (E31) |