Demand Elasticities, Nominal Rigidities and Asset Prices

Nuno Clara
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Nuno Clara: London Business School

No 790, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: This paper examines the joint implications of heterogeneous demand elasticities and nominal rigidities to firm fundamentals and asset prices. Nominal rigidities create operational leverage in firms and therefore create a role for demand elasticity to matter for cross-sectional differences in firm fundamentals and asset prices. I develop a novel method to estimate demand elasticities at the firm level by using high frequency Amazon product data. I find that firms with more elastic demands have lower markups and earn a return premium of 6.2% over firms with more inelastic demands. These results are consistent with a multi-sector new-keynesian model where firms face both different demand elasticities and nominal rigidities.

Date: 2018
New Economics Papers: this item is included in nep-bec and nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:790

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