News

September 2017 The research seminar is held every Wednesday, 1.15 – 2.45 p.m., in room LG 0.423.
Exceptions: On 11/15/2017, 11/22/2017 and 12/13/2017 the event is held in room 4.154!
Here you can download the Program-for-winter-term-2017/18
07/02/2018

Room LG 0.423

Almut Balleer, RWTH Aachen

“Financial Constraints and Nominal Price Rigidities”

 

Abstract:

This paper investigates how financial market imperfections and the frequency of price adjustment interact. Based on new firm-level evidence for Germany, we document that financially constrained firms adjust prices more often than their unconstrained counterparts, both upwards and downwards. At the same time, the overall frequency of price adjustments decreases with the number of financially constrained firms in the economy. We show that these empirical patterns are consistent with a partial equilibrium menu-cost model with a working capital constraint. In this model, financial frictions generate important asymmetries in the policy function and price distribution of firms. Our results suggest that tighter financial constraints are associated with higher nominal rigidities, higher prices and lower output. Moreover, in response to aggregate shocks, aggregate price rigidity moves substantially, the response of inflation is dampened, while output reacts more in the presence of financial frictions. We show that this differs fundamentally from models in which the extensive margin of price adjustment is absent Rotemberg82 or constant Calvo83. Hence, the interaction of financial frictions and the frequency of price adjustment changes and intensifies the propagation of shocks through the traditional cost channel and potentially induces important consequences for the effectiveness of monetary policy.