Amidst the recent resurgence of inflation, this paper investigates the interplay of corporate profits and income distribution in shaping inflation and aggregate demand within the New Keynesian framework. We derive a novel analytical condition for profits to be procyclical and inflationary.
Transmission Research Theme Coordinator and Professor of International Economics and a Fellow of St. John's College, Professor Meredith Crowley, Elisa Faraglia, a University Associate Professor, Fellow at King's College, and Research Fellow at CEPR, and Flavio Toxvaerd, a University Associate Professor at the Faculty of Economics, Fellow of Clare College, and also a Research Fellow at CEPR.
I build a model in which speculators unwind carry trades and hedgers fly to relatively liquid U.S. Treasuries during global financial disasters. The net effect of these flows produces an amplified U.S. dollar appreciation against high-yield currencies in disasters and a dampened depreciation, or even an appreciation, against low-yield ones. I verify this prediction by examining deviations from uncovered interest parity (UIP) within a novel quantile-regression framework.