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

Almut Balleer, Nikolay Hristov, Michael Kleemann and Dominik Menno

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

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 tighter financial constraints are associated with higher nominal rigidities, higher prices and lower output. Furthermore, financial recessions may induce very different dynamics than normal recessions if the relative size of unexpected financial shocks is large relative to aggregate price shocks.

JEL-codes: E31 E32 E44 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-bec and nep-mac
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Citations: View citations in EconPapers (5)

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Working Paper: Financial Market Imperfections and the Pricing Decision of Firms: Theory and Evidence (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:113054

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