Discussion paper
DP18385 Greed? Profits, Inflation, and Aggregate Demand
We investigate the interplay of corporate profits and income distribution in shaping inflation and aggregate demand within the New Keynesian framework. We derive an analytical condition for profits to be procyclical and inflationary. The profit cyclicality is a key determinant of the model’s propagation properties under household heterogeneity, but for aggregate-demand fluctuations to be amplified by heterogeneity, profits have to be countercyclical—an implication at odds with the data. When adding capital investment, there can be aggregate-demand amplification under procyclical profits but it works through an investment channel and not profits, inconsistent with the narrative attributing inflation to corporate greed.
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