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Closed and open economy models of business cycles with marked-up and sticky prices

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  • Robert Barro
  • Silvana Tenreyro

Abstract

Shifts in the extent of competition, which affect markup ratios, are possible sources of aggregate business fluctuations. markups are countercyclical, and booms are times at which the economy operates more efficiently. We begin with a real model in which markup ratios correspond to the prices of differentiated intermediate inputs relative to the price of undifferentiated final product. If the nominal prices of the differentiated goods are relatively sticky, then unexpected inflation reduces the relative price of intermediates and, thereby, mimics the output effects from an increase in competition. In an open economy, domestic output is stimulated by reductions in the relative price of foreign intermediates and, therefore, by unexpected inflation abroad. The models tend to imply that relative output prices are more countercyclical the less competitive the sector. We find support for this hypothesis from price data of four-digit manufacturing industries.

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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (2001)
Issue (Month): Jun ()
Pages:

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Handle: RePEc:fip:fedfpr:y:2001:i:jun:x:3

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Keywords: Business cycles ; Prices;

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References

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  1. Robert J. Barro & David B. Gordon, 1984. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  2. Alberto Alesina & Robert J. Barro, 2000. "Currency Unions," NBER Working Papers 7927, National Bureau of Economic Research, Inc.
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    • Robert J. Barro & Paul Romer, 1993. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr93-1, May.
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  13. Kraay, Aart & Ventura, Jaume, 2001. "Product Prices and the OECD Cycle," CEPR Discussion Papers 3019, C.E.P.R. Discussion Papers.
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