Scandinavian Working Papers in Economics
Working Paper Series,
Uppsala University, Department of Economics
No 2002:3: Why Don't Prices Fall in a Recession? Financial Constraints, Investment, and Customer Relations
Charlotte Bucht, Nils Gottfries () and Magnus Lundin
Additional contact information
Charlotte Bucht: Ministry of Finance, Postal: 103 33 Stockholm, Sweden
Nils Gottfries: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Magnus Lundin: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
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
36 pages, February 12, 2002
Full text files
wp2002_3.pdf
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