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

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Author Info
Robert J. Barro
Silvana Tenreyro

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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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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0297.2006.01087.x
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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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December. [Downloadable!] (restricted)
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  4. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September. [Downloadable!] (restricted)
  5. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May. [Downloadable!] (restricted)
  6. Aart Kraay & Jaume Ventura, 2000. "Product Prices and the OECD Cycle," NBER Working Papers 7788, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Julio J. Rotemberg & Michael Woodford, 1999. "The Cyclical Behavior of Prices and Costs," NBER Working Papers 6909, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June. [Downloadable!] (restricted)
  9. Eric J. Bartelsman & Wayne Gray, 1996. "The NBER Manufacturing Productivity Database," NBER Technical Working Papers 0205, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Alberto Alesina & Enrico Spolaore & Romain Wacziarg, 2000. "Economic Integration and Political Disintegration," American Economic Review, American Economic Association, vol. 90(5), pages 1276-1296, December. [Downloadable!] (restricted)
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    • Robert J. Barro & Paul M. Romer, 1991. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr91-1.
  14. Julio Rotemberg & Garth Saloner, 1986. "The Relative Rigidity of Monopoly Pricing," Working papers 414, Massachusetts Institute of Technology (MIT), Department of Economics.
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  15. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  16. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
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  18. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September. [Downloadable!] (restricted)
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  19. Basu, S., 1993. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," Papers 93-23, Michigan - Center for Research on Economic & Social Theory.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Giovanni Lombardo, . "Sticky Prices, Markup and the Business Cycle: Some Evidence," Discussion Papers 01/06, Department of Economics, University of York. [Downloadable!]
  2. Tommaso Mancini Griffoli, 2006. "Explaining the Euro's Effect on Trade? Interest Rates in an Augmented Gravity Equation," HEI Working Papers 10-2006, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
  3. Silvana Tenreyro & Robert J. Barro, 2002. "Economic effects of currency unions," Working Papers 02-4, Federal Reserve Bank of Boston. [Downloadable!]
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  4. Alberto Alesina & Robert J. Barro & Silvana Tenreyro, 2002. "Optimal Currency Areas," NBER Working Papers 9072, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. 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. [Downloadable!]
    Other versions:
  6. Sascha A. Weber & Sven M. Anders, 2007. "Price rigidity and market power in German retailing," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 737-749. [Downloadable!]
    Other versions:
  7. Luís F. Costa & Huw Dixon, 2009. "Fiscal Policy under Imperfect Competition: A Survey," Working Papers 2009/25, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
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