Financial Market Imperfections and the Pricing Decision of Firms: Theory and Evidence

Nikolay Hristov, Dominik Menno and Almut Balleer
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Nikolay Hristov: ifo Institute
Dominik Menno: EUI and University of Mannheim

No 1173, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: This paper investigates how financial market imperfections and nominal rigidities interact. Based on new firm-level evidence for Germany, we document that financially constrained firms adjust prices more often than their unconstrained counterparts. In particular, financially constrained firms do not only increase prices, but also decrease prices more often. We show that these empirical patterns are consistent with a partial equilibrium menu-cost model with financial frictions. Our results suggest that in the presence of financial frictions both inflation might be higher and monetary policy might be less effective.

Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:1173

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