Greed? Profits, Inflation, and Aggregate Demand

Florin Bilbiie and Diego Känzig

No 31618, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We investigate whether corporate profits can drive elevated inflation through the interplay of income distribution dynamics and aggregate demand—our narrow definition of the “greed” narrative—within the New Keynesian framework. We first derive an analytical condition for profits to be procyclical and thus inflationary in response to demand expansions. Yet when distributional mechanisms are of the essence, as under the greed view, a conundrum emerges: procyclical profits accruing to low-MPC asset-holders imply a dampening of aggregate demand, yielding deflationary forces—the opposite of greedflation. Adding capital investment undoes part of this as it delivers aggregate-demand amplification even under procyclical profits, but the deflationary effects of the latter are still operating in a compensating way. Countercyclical income risk can deliver the amplified inflationary response; yet since this operates through a precautionary-saving channel and not profits, it is still inconsistent with the narrative directly attributing inflation to corporate greed.

JEL-codes: D11 E32 E52 E62 (search for similar items in EconPapers)
Date: 2023-08
New Economics Papers: this item is included in nep-dge and nep-mon
Note: EFG ME
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Related works:
Working Paper: Greed? Profits, Inflation, and Aggregate Demand (2023)
Working Paper: Greed? Profits, Inflation, and Aggregate Demand (2023)
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