Melinda Suveg defends her thesis "Finance, Shocks, Competition and Price Setting"
Melinda Suveg defends her thesis "Finance, Shocks, Competition and Price Setting" on September 13 at 10:15 in Lecture Hall 2 at Ekonomikum. Please note that the defence will be held both digitally via Zoom and in the lecture hall, but the number of seats in the lecture hall is limited.
The thesis consists of three essays on firms’ price setting behavior and its implication for the macroeconomy. Using data on Swedish firms, the essays investigate (i) whether producer prices increase when the central bank (Riksbank) increases the policy rate (ii) whether prices of the remaining firms increase when some competitors leave their markets and (iii) how firms' markups depend on input cost uncertainty.
Discussant is Professor Richard Friberg, Stockholm School of Economics and Grading committee memebers are Professor Karolina Ekholm, Department of Economics, Stockholm University, Professor Mikael Carlsson, Department of Economics, Uppsala University and Professor Anders Ögren, Department of Economic History, Uppsala University.
Advisors are Professor Nils Gottfries, Department of Economics, Uppsala University, David Vestin, Senior Advisor, Sveriges Riksbank and Associate Professor Teodora Borota Milicevic, Department of Economics, Uppsala University.
Abstract
Essay I: The New Keynesian model augmented with the working capital channel predicts that (i) a rise in the policy rate increases producer prices, with a stronger impact on firms that use more working capital, (ii) the pass-through of policy rate changes to prices is gradual because of price rigidity and (iii) unanticipated policy rate changes have larger effects than anticipated changes. Using firm-level micro data, I test these predictions. I show that a firm with average working capital holdings increases its price by 0.1 percent after 3 months and by 0.2 percent after 6 months following a percentage unit increase in the policy rate.
Essay II: This paper examines how changes in product market concentration, specifically firm exit, affect prices. I develop a model where firms have variable markups to show that the remaining firms increase their markups and prices after their competitors' exit. The model predictions are tested using micro-data on Swedish firms. I use the exposure of firms to a bank, which was severely affected by the financial crisis abroad, as an instrument to identify the causal relationship between firm exit and prices. I find that the remaining firms increase their prices by 0.3 percent when firms with a combined market share of one percent exit.
Essay III (with Sneha Agrawal and Abhishek Gaurav): In this paper, we study a new channel to explain firms' price setting behavior. We propose that uncertainty about factor prices has a positive effect on markups. We show theoretically that firms with higher shares of inputs with volatile prices set higher markups. We use the Bartik shift-share approach to empirically test whether firms which use more oil relative to other inputs set higher markups when oil prices are more volatile. Our estimates imply that a one standard deviation increase in oil price volatility leads to a 0.38 percent increase in the markup of firms with average oil exposure.
Download the thesis from Diva here
Read more about Melinda here