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Estimating the Price Markup in the New Keynesian Model

Author

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  • Martin M. Andreasen

    (Aarhus University and CREATES and The Danish Finance Institute)

  • Mads Dang

    (Aarhus University and CREATES)

Abstract

This paper shows that the price demand elasticity can be estimated reliably in a standard log-linearized version of the New Keynesian model when including firm profit as an observable in the estimation. Using this identification strategy for the post-war US economy, we find an estimated price demand elasticity of 2.58 with a tight standard error of 0.31. This corresponds to an average price markup of 63% with a 95% confidence interval of [39%, 88%]. We also show that a calibrated markup of 20%, as commonly used in the literature, is rejected by the data, because it generates too much variability in firm profit.

Suggested Citation

  • Martin M. Andreasen & Mads Dang, 2019. "Estimating the Price Markup in the New Keynesian Model," CREATES Research Papers 2019-03, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2019-03
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    References listed on IDEAS

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    Cited by:

    1. Ivashchenko, Sergey & Mutschler, Willi, 2020. "The effect of observables, functional specifications, model features and shocks on identification in linearized DSGE models," Economic Modelling, Elsevier, vol. 88(C), pages 280-292.

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    More about this item

    Keywords

    Aggregate supply curve; Identification; Likelihood inference; New Keynesian model; Price markup;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory

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