Why Don't Prices Fall in a Recession? Financial Constraints, Investment, and Customer Relations

Bucht, Charlotte; Gottfries, Nils; Lundin, Magnus

doi:10.2139/ssrn.311282

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Why Don't Prices Fall in a Recession? Financial Constraints, Investment, and Customer Relations

Uppsala University Department of Economics Working Paper No. 2002:3

33 Pages Posted: 22 May 2002

See all articles by Charlotte Bucht

Nils Gottfries

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Magnus Lundin

Uppsala University - Department of Economics

Date Written: February 2002

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.

JEL Classification: E31, E32, E44

Suggested Citation: Suggested Citation

Bucht, Charlotte and Gottfries, Nils and Lundin, Magnus, Why Don't Prices Fall in a Recession? Financial Constraints, Investment, and Customer Relations (February 2002). Uppsala University Department of Economics Working Paper No. 2002:3, Available at SSRN: https://ssrn.com/abstract=311282 or http://dx.doi.org/10.2139/ssrn.311282