DP14907 Demand or Supply? Price Adjustment during the Covid-19 Pandemic

Author(s): Almut Balleer, Sebastian Link, Manuel Menkhoff, Peter Zorn
Publication Date: June 2020
Date Revised: August 2020
Keyword(s): COVID-19, demand, Fiscal policy, Producer price setting, Supply
JEL(s): D22, E31, E32, E60, H50
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14907

We study price-setting behavior in German firm-level survey data to infer the relative importance of supply and demand during the Covid-19 pandemic. Supply and demand forces coexist, but demand shortages dominate in the short run. A reported negative impact of Covid-19 on current business is associated with a rise in the probability to decrease prices up to eleven percentage points. These results imply a role for aggregate demand stabilization policy to buffer the economic consequences of Covid- 19 while containing the pandemic.