Simon Gilchrist, Raphael Schoenle, Jae Sim, and Egon Zakrajšek
CQER Working Paper 15-04
November 2015
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Firms with limited internal liquidity significantly increased prices in 2008, while their liquidity unconstrained counterparts slashed prices. Differences in the firms' price-setting behavior were concentrated in sectors likely characterized by customer markets. The authors develop a model in which firms face financial frictions while setting prices in a customer-markets setting. Financial distortions create an incentive for firms to raise prices in response to adverse demand or financial shocks. These results reflect the firms' reaction 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.
JEL classification: E31, E32, E44, E51
Key words: missing deflation, sticky customer base, costly external finance, financial shocks, cost channel, inflation-output tradeoff
The authors thank Rudi Bachmann, Mark Bils, Marco Del Negro, Etienne Gagnon, Marc Giannoni, Yuriy Gorodnichenko, Jim Kahn, Emi Nakamura, and Joe Vavra for helpful comments and suggestions. The authors also benefited from comments from participants at the 2013 AEA Annual Meetings; workshop on Current Macroeconomic Challenges (Banque de France and Deutsche Bundesbank); 21st CEPR ESSIM (Central Bank of Turkey); conference on Challenges for Monetary Policy in the 21st Century (Bank of Canada and CREI); conference on Inflation Dynamics in a Post-Crisis Globalized Economy (BIS and SNB); seminars at Federal Reserve Banks of Cleveland, New York, and Philadelphia; 2013 IRFMP (Federal Reserve Board); 2013 Annual SED meetings; 2013 NBER-ME meetings; seminars at Brown, Columbia, Duke, Georgetown, George Washington, and Johns Hopkins universities; 2014 Minnesota Workshop in Macroeconomic Theory; 2014 NBER-SI EFG meetings; and 2015 SED/ASSA meetings. The authors are especially grateful to our BLS project coordinators Kristen Reed, Ryan Ogden, and Rozi Ulics for their substantial help with this project and to Jonathan Weinhagen for sharing his expertise with the PPI micro-level data. Jane Brittingham, Holly Dykstra, Samuel Haltenhof, Matthew Klepazc, and Shaily Patel provided outstanding research assistance at various stages of this project. Gilchrist and Schoenle thank the National Science Foundation for financial support. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Simon Gilchrist, Boston University and NBER, sgilchri@bu.edu; Raphael Schoenle, Brandeis University, schoenle@brandeis.edu; Jae Sim, Federal Reserve Board of Governors, jae.w.sim@frb.gov; or Egon Zakrajšek, Federal Reserve Board of Governors, egon.zakrajsek@frb.gov.
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