Greed? Profits, Inflation, and Aggregate Demand / Florin O. Bilbiie, Diego R. Känzig.

Format:

Book

Author/Creator:

Bilbiie, Florin O.

Contributor:

National Bureau of Economic Research.

Känzig, Diego R.

Series:

Working Paper Series (National Bureau of Economic Research) no. w31618.

NBER working paper series no. w31618

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

Amidst the recent resurgence of inflation, this paper investigates the interplay of corporate profits and income distribution in shaping inflation and aggregate demand within the New Keynesian framework. We derive a novel analytical condition for profits to be procyclical and inflationary. Furthermore, we show that the cyclicality of profits is a key determinant of the propagation properties of these models under household heterogeneity, but there is a catch: for aggregate-demand fluctuations and inflation to be amplified by heterogeneity, profits have to be countercyclical--an implication that is at odds with the data. Adding physical capital investment to the model can resolve this conundrum, generating aggregate-demand amplification even under procyclical profits. However, the amplification works through an investment channel and not through profits, inconsistent with the narrative attributing elevated inflation to corporate greed.

Notes:

Print version record

August 2023.