This paper investigates how financial market imperfections and the frequency of price adjustment
interact. Based on new firm-level evidence for Germany, we document that financially constrained
firms adjust prices more often than their unconstrained counterparts, both upwards and downwards.
We show that these empirical patterns are consistent with a partial equilibrium menu-cost model
with a working capital constraint. We then use the model to show how the presence of financial
frictions changes profits and the price distribution of firms compared to a model without financial
frictions. Our results suggest that tighter financial constraints are associated with higher nominal
rigidities, higher prices and lower output. Moreover, in response to aggregate shocks, aggregate price
rigidity moves substantially, the response of inflation is dampened, while output reacts more in the
presence of financial frictions. This means that financial frictions make the aggregate supply curve
flatter for all calibrations considered in our model. We show that this differs fundamentally from
models in which the extensive margin of price adjustment is absent (Rotemberg, 1982) or constant
(Calvo, 1983). Hence, the interaction of financial frictions and the frequency of price adjustment
potentially induces important consequences for the effectiveness of monetary policy.