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© 2024 International Monetary Fund
WP/24/43
IMF Working Paper
European Department
Is Inflation Good for Business? The Firm-Level Impact of Inflation Shocks in the Baltics, 1997–2021
Prepared by Serhan Cevik, Alice Fan and Sadhna Naik*
Authorized for distribution by Bernardin Akitoby
March 2024
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: Using a large panel of firm-level data, this paper provides an analysis of how inflation shocks in the Baltics between 1997 and 2021 affected total factor productivity (TFP), gross profitability, and net fixed investment in nonfinancial sectors. First, we find that inflation and inflation volatility had mixed effects on TFP growth, profitability and net fixed investment in the first year as well as over the medium term, albeit at a dissipating rate. Second, focusing on subsamples, we find that inflation shocks had differential effects on large versus small firms. Third, we explore sectoral heterogeneity in how firms responded to inflation shocks and observe significant variation across tradable and non-tradable sectors. Finally, estimates from a state-dependent model suggest that firms’ response to inflation shocks varied with the state of the economy. The results suggest that nonfinancial firms in the Baltics have been agile in adjusting to inflation shocks, possibly by either transferring higher production costs to consumers or substituting inputs. Given the differences in the level and nature of the recent inflation shock and the sample period on which our analysis is based, empirical findings presented in this paper might not necessarily apply to the latest bout of inflation in the Baltics.
RECOMMENDED CITATION: Cevik, S., A. Fan and S. Naik, “Is Inflation Good for Business? The Firm-Level Impact of Inflation Shocks in the Baltics, 1997–2021,” IMF Working Paper No. 24/43 (Washinghton, DC: International Monetary Fund).
| JEL Classification Numbers: | D22; H32; E3; E31; L25 |
| Keywords: | Inflation; firm performance; productivity; profitability; fixed investment; Baltics; Estonia; Latvia; Lithuania |
| Author’s E-Mail Address: | scevik@imf.org; afan@imf.org; snaik@imf.org |
| JEL Classification Numbers: | D22; H32; E3; E31; L25 |
| Keywords: | Inflation; firm performance; productivity; profitability; fixed investment; Baltics; Estonia; Latvia; Lithuania |
| Author’s E-Mail Address: | scevik@imf.org; afan@imf.org; snaik@imf.org |
Title Page
WORKING PAPERS
Is Inflation Good for Business?
The Firm-Level Impact of Inflation Shocks in the Baltics, 1997–2021
Prepared by Serhan Cevik, Alice Fan and Sadhna Naik
Contents
I. Introduction
II. Literature Review
III. Data Overview
IV. Econometric Strategy
V. Empirical Results
VI. Conclusion
References
TABLES AND FIGURES
Table 1. Summary Statistics
Table 2. Firm-Level Impact of Inflation
Table 3. Firm-Level Impact of Inflation Volatility
Figure 1. Inflation Shocks and Corporate Performance: Baseline
Figure 2. Inflation Shocks and Corporate Performance: Small vs. Large Firms
Figure 3. Inflation Shocks and Corporate Performance: Tradable vs. Non-Tradable Sectors
Figure 4. Inflation Shocks and Corporate Performance: State-Dependent Estimations
“The authors would like to thank Bernardin Akitoby, Helge Berger, Borja Gracia, Vincenzo Guzzo, Bingjie Hu, Neree Nouman, Keyra Primus, Michelle Tejada, the Bank of Estonia, the Bank of Latvia, and participants of a conference at Vilnius University for helpful comments and suggestions.