Sector-specific Markup Fluctuations and the Business Cycle
AbstractThe 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 InfoPaper provided by European University Institute in its series Economics Working Papers with number ECO2007/25.
Date of creation: 2007
Date of revision:
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endogenous markups; firm entry and exit; relative prices;
Other versions of this item:
- Alain Gabler, 2008. "Sector-specific Markup Fluctuations and the Business Cycle," 2008 Meeting Papers 88, Society for Economic Dynamics.
- E25 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-03 (All new papers)
- NEP-BEC-2007-11-03 (Business Economics)
- NEP-CBA-2007-11-03 (Central Banking)
- NEP-DGE-2007-11-03 (Dynamic General Equilibrium)
- NEP-MAC-2007-11-03 (Macroeconomics)
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