Working Paper Series, Department of Economics, Uppsala University
No 2002:3:
Why Don't Prices Fall in a Recession? Financial Constraints, Investment, and Customer Relations
Charlotte Bucht, Nils Gottfries ()
and Magnus Lundin
Abstract: We construct a model of a financially constrained firm
making pricing and investment decisions. The firm operates in a market
where customers respond slowly to price changes and there are
implementation lags in investment (time to build). Our model implies that
the markup over marginal cost is counter-cyclical, the product price
responds slowly to demand shocks, and quickly to cost shocks, and the price
is strongly related to investment. Estimating the decision rules on
aggregate data for Swedish industry, we find that the qualitative results
are in line with our model.
Keywords: customer market; price rigidity; price equation; investment equation; (follow links to similar papers)
JEL-Codes: E31; E32; E44; (follow links to similar papers)
36 pages, February 12, 2002
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