August 2020

IZA DP No. 13568: Demand or Supply? Price Adjustment during the COVID-19 Pandemic

Almut Balleer, Sebastian Link, Manuel Menkhoff, Peter Zorn

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.