Greed? Profits, Inflation, and Aggregate Demand

Florin Bilbiie and Diego R. Kanzig

Janeway Institute Working Papers from Faculty of Economics, University of Cambridge

Abstract: Amidst the recent resurgence of inflation, this paper investigates the interplay of corporate profits and income distribution in shaping inflation and aggregate demand within the New Keynesian framework. We derive a novel analytical condition for profits to be procyclical and inflationary. Furthermore, we show that the cyclicality of profits is a key determinant of the propagation properties of these models under household heterogeneity, but there is a catch: for aggregate-demand fluctuations and inflation to be amplified by heterogeneity, profits have to be countercyclical—an implication that is at odds with the data. Adding physical capital investment to the model can resolve this conundrum, generating aggregate-demand amplification even under procyclical profits. However, the amplification works through an investment channel and not through profits, inconsistent with the narrative attributing elevated inflation to corporate greed.

Keywords: Aggregate demand; income distribution; inflation; profits (search for similar items in EconPapers)
JEL-codes: D11 E32 E52 E62 (search for similar items in EconPapers)
Date: 2023-07-22
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Note: fob21
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https://www.janeway.econ.cam.ac.uk/working-paper-pdfs/jiwp2313.pdf

Related works:
Working Paper: Greed? Profits, Inflation, and Aggregate Demand (2023)
Working Paper: Greed? Profits, Inflation, and Aggregate Demand (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camjip:2313

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