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Markup variation and endogenous fluctuations in the price of investment goods

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Author Info
Max Floetotto
Nir Jaimovich
Seth Pruitt

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Abstract

The two sector model presented in this note suggests a simple structural decomposition of movements in the price of investment goods into exogenous and endogenous sources. The endogenous fluctuations arise in the presence of countercyclical markups which vary differently across the consumption and investment sectors. In turn, the movements in the markups are due to endogenous procyclical net business formation. The model, while being consistent with the countercyclicality of the price of investment goods, suggests that about a quarter of the movement in the price series can be attributed to this endogenous mechanism.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 968.

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Date of creation: 2009
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Keywords: Stock - Prices ; Business cycles;

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