Price Dynamics and the Financing Structure of Firms in Emerging Economies

Peer Reviewed icon Peer Reviewed
Date issued
Apr 2018
Subject
Monetary Policy;
Informal Credit;
Inflation
JEL code
E24 - Employment • Unemployment • Wages • Intergenerational Income Distribution • Aggregate Human Capital • Aggregate Labor Productivity;
E32 - Business Fluctuations • Cycles;
G18 - Government Policy and Regulation;
O17 - Formal and Informal Sectors • Shadow Economy • Institutional Arrangements
Country
Mexico
Category
Discussion Papers
We use a novel dataset that merges goods-level prices underlying the CPI in Mexico with the balance sheet information of Mexican publicly listed firms and study the connection between firms' financing structure and price dynamics in an emerging economy. First, we find that larger firms (in terms of sales and employees) tend to use more interfirm trade credit relative to bank credit. Second, these firms use interfirm trade credit as a mechanism to smooth variations in their prices. Third, all else equal, firms with a higher trade-to-bank credit ratio tend to lower prices. In turn, the behavior of these firms explains the negative relationship between aggregate trade credit growthand inflation in the data. A tractable New Keynesian model with search frictions in physical input markets sheds light on firms' structural characteristics as well as the economic mechanisms that rationalize our empirical findings.