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Sector-specific Markup Fluctuations and the Business Cycle

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  • Alain Gabler

Abstract

The counter-cyclicality in the relative price of equipment investment which is observed in the U.S. has been attributed to equipment-specific productivity shocks. Cross-country evidence indicates that a number of countries experience sizeable delays between a surge in equipment production and a fall in its relative price, which is difficult to reconcile with sector-specific shocks. I show that in the presence of sector specific, time-varying markups, relative price movements arise as a direct consequence of consumption smoothing, even if all shocks are aggregate, while barriers to firm entry lead to delays in relative price responses. A calibrated version of the model explains around one-third of the relative price fluctuations which are observed in the U.S., as well as the qualitative differences in the behaviour of this relative price across countries.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2007/25.

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Date of creation: 2007
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Handle: RePEc:eui:euiwps:eco2007/25

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Keywords: endogenous markups; firm entry and exit; relative prices;

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  1. Samuel Bentolila & Gilles Saint-Paul, 2003. "Explaining Movements in the Labor Share," The B.E. Journal of Macroeconomics, De Gruyter, vol. 0(1), pages 9.
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  11. Steve Ambler & Emanuela Cardia, 1993. "The Cyclical Behaviour of Wages and Profits under Imperfect Competition," Cahiers de recherche CREFE / CREFE Working Papers 18, CREFE, Université du Québec à Montréal, revised Jun 1996.
  12. Dos Santos Ferreira, Rodolphe & Lloyd-Braga, Teresa, 2005. "Non-linear endogenous fluctuations with free entry and variable markups," Journal of Economic Dynamics and Control, Elsevier, vol. 29(5), pages 847-871, May.
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  14. Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 931-948, November.
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