Inflation Dynamics During the Financial Crisis

FEDS Working Paper No. 2015-012

http://dx.doi.org/10.17016/FEDS.2015.012

53 Pages Posted: 19 Apr 2015

See all articles by Simon Gilchrist

Simon Gilchrist

Boston University - Department of Economics; National Bureau of Economic Research (NBER)

Raphael Schoenle

Brandeis University

Jae Sim

Board of Governors of the Federal Reserve System

Egon Zakrajsek

Federal Reserve Board - Division of Monetary Affairs

Multiple version iconThere are 2 versions of this paper

Date Written: February 25, 2015

Abstract

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. We 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.

Keywords: Deflation,Monetary policy,Prices, business fluctuations, cycles

JEL Classification: E31, E32, E44, E51

Suggested Citation

Gilchrist, Simon and Schoenle, Raphael and Sim, Jae W. and Zakrajsek, Egon, Inflation Dynamics During the Financial Crisis (February 25, 2015). FEDS Working Paper No. 2015-012. Available at SSRN: https://ssrn.com/abstract=2595668 or http://dx.doi.org/10.2139/ssrn.2595668

Simon Gilchrist

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Raphael Schoenle

Brandeis University ( email )

Waltham, MA 02454
United States

Jae W. Sim

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Egon Zakrajsek (Contact Author)

Federal Reserve Board - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-728-5864 (Phone)
202-452-3819 (Fax)

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