Is Inflation Good for Business? The Firm-Level Impact of Inflation Shocks in the Baltics, 1997-2021

23 Pages Posted: 7 Mar 2024

See all articles by Serhan Cevik

Serhan Cevik

International Monetary Fund (IMF)

Alice Fan

International Monetary Fund (IMF)

Sadhna Naik

International Monetary Fund (IMF)

Abstract

Using a large panel of firm-level data, this paper provides an analysis of how inflation shocks in the Baltics between 1997 and 2021 affected total factor productivity (TFP), gross profitability, and net fixed investment in nonfinancial sectors. First, we find that inflation and inflation volatility had mixed effects on TFP growth, profitability and net fixed investment in the first year as well as over the medium term, albeit at a dissipating rate. Second, focusing on subsamples, we find that inflation shocks had differential effects on large versus small firms. Third, we explore sectoral heterogeneity in how firms responded to inflation shocks and observe significant variation across tradable and non-tradable sectors. Finally, estimates from a state-dependent model suggest that firms’ response to inflation shocks varied with the state of the economy. The results suggest that nonfinancial firms in the Baltics have been agile in adjusting to inflation shocks, possibly by either transferring higher production costs to consumers or substituting inputs. Given the differences in the level and nature of the recent inflation shock and the sample period on which our analysis is based, empirical findings presented in this paper might not necessarily apply to the latest bout of inflation in the Baltics.

Keywords: Inflation, firm performance, productivity, profitability, fixed investment, Baltics, Estonia, Latvia, Lithuania

JEL Classification: D22, H32, E30, E31, L25

Suggested Citation

Cevik, Serhan and Fan, Alice and Naik, Sadhna, Is Inflation Good for Business? The Firm-Level Impact of Inflation Shocks in the Baltics, 1997-2021. IMF Working Paper No. 2024/043, Available at SSRN: https://ssrn.com/abstract=4750175 or http://dx.doi.org/10.5089/9798400269936.001

Serhan Cevik (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alice Fan

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Sadhna Naik

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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