Inflation Dynamics During the Financial Crisis

Simon Gilchrist, Raphael Schoenle, Jae Sim, Egon Zakrajšek

NBER Working Paper No. 22827
Issued in November 2016
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

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.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w22827

Published: Simon Gilchrist & Raphael Schoenle & Jae Sim & Egon Zakrajšek, 2017. "Inflation Dynamics during the Financial Crisis," American Economic Review, American Economic Association, vol. 107(3), pages 785-823, March. citation courtesy of