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Closed and Open Economy Models of Business Cycles with Marked Up and Sticky Prices

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  • Robert J. Barro
  • Silvana Tenreyro

Abstract

Shifts in the extent of competition, which affect markups, are possible sources of aggregate fluctuations. Markups are countercyclical; during booms the economy operates more efficiently. In our benchmark model, markups correspond to the prices of differentiated inputs relative to that of undifferentiated final product. If nominal prices of differentiated goods are relatively sticky, unexpected inflation reduces markups, mimicking the effects of increased competition. Similar effects stem from reductions in markups of foreign intermediates and unexpected inflation abroad. The models imply that prices of less competitive goods are more countercyclical. We find support for this hypothesis using data of four-digit manufacturing industries. Copyright 2006 Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 116 (2006)
Issue (Month): 511 (04)
Pages: 434-456

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Handle: RePEc:ecj:econjl:v:116:y:2006:i:511:p:434-456

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Citations

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Cited by:
  1. Giovanni Lombardo, . "Sticky Prices, Markup and the Business Cycle: Some Evidence," Discussion Papers 01/06, Department of Economics, University of York.
  2. Weber, Sascha A. & Anders, Sven, 2007. "Price Rigidity and Market Power in German Retailing," Discussion Papers 31, Justus Liebig University Giessen, Center for international Development and Environmental Research (ZEU).
  3. Robert Barro & Silvana Tenreyro, 2007. "Economic Effects Of Currency Unions," Economic Inquiry, Western Economic Association International, vol. 45(1), pages 1-23, 01.
  4. Tommaso Mancini Griffoli, 2006. "Explaining the Euro's Effect on Trade? Interest Rates in an Augmented Gravity Equation," IHEID Working Papers 10-2006, Economics Section, The Graduate Institute of International Studies.
  5. António Afonso & Luís Costa, 2010. "Market Power and Fiscal Policy in OECD Countries," Working Papers 2010/11, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon..
  6. Alberto Alesina & Robert J. Barro & Silvana Tenreyro, 2002. "Optimal Currency Areas," NBER Working Papers 9072, National Bureau of Economic Research, Inc.
    • Alberto Alesina & Robert J. Barro & Silvana Tenreyro, 2003. "Optimal Currency Areas," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 301-356 National Bureau of Economic Research, Inc.
  7. Costa, Luís F. & Dixon, Huw David, 2010. "Fiscal policy under imperfect competition: A survey," Economics Discussion Papers 2010-14, Kiel Institute for the World Economy.
  8. Costa, Luís & Palma, Nuno, 2006. "Comment on "Productive Public Expenditure and Imperfect Competition with Endogenous Price Markup"," MPRA Paper 5143, University Library of Munich, Germany, revised 08 Jun 2007.
  9. Plehn-Dujowich, Jose M., 2008. "On the counter-cyclicality of prices and markups in a Cournot model of entry," Economics Letters, Elsevier, vol. 99(2), pages 310-313, May.

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