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  3. American Economic Review
  4. March 2017
  5. Inflation Dynamics during the Financial Crisis

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Inflation Dynamics during the Financial Crisis

  • Simon Gilchrist
  • Raphael Schoenle
  • Jae Sim
  • Egon Zakrajšek
American Economic Review
vol. 107, no. 3, March 2017
(pp. 785–823)
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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.

Citation

Gilchrist, Simon, Raphael Schoenle, Jae Sim, and Egon Zakrajšek. 2017. "Inflation Dynamics during the Financial Crisis." American Economic Review, 107 (3): 785–823. DOI: 10.1257/aer.20150248

Additional Materials

JEL Classification

  • E31 Price Level; Inflation; Deflation
  • E32 Business Fluctuations; Cycles
  • E44 Financial Markets and the Macroeconomy
  • G01 Financial Crises
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • L11 Production, Pricing, and Market Structure; Size Distribution of Firms