Is inflation good for business? the firm-level impact of inflation shocks in the Baltics, 1997–2020

Serhan Cevik, Alice Fan and Sadhna Naik
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Alice Fan: International Monetary Fund
Sadhna Naik: International Monetary Fund

Economic Change and Restructuring, 2024, vol. 57, issue 5, No 12, 19 pages

Abstract: Abstract Using a large panel of firm-level data, this paper provides an analysis of how inflation shocks in the Baltics between 1997 and 2020 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 spending 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 (search for similar items in EconPapers)
JEL-codes: D21 E3 H32 L25 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10644-024-09749-z

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