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Demand Elasticities, Nominal Rigidities and Asset Prices

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  • Nuno Clara

    (London Business School)

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.

Suggested Citation

  • Nuno Clara, 2018. "Demand Elasticities, Nominal Rigidities and Asset Prices," 2018 Meeting Papers 790, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:790
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