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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Inflation Dynamics During the Financial Crisis
Simon Gilchrist
Raphael Schoenle
Jae W. Sim
Egon Zakrajsek
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.


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Simon Gilchrist & Raphael Schoenle & Jae W. Sim & Egon Zakrajsek, Inflation Dynamics During the Financial Crisis, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2015-12, 03 Mar 2015.
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