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Sector-specific Markup Fluctuations and the Business Cycle

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  • Alain Gabler

    (University of Toulouse (GREMAQ-CNRS))

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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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 88.

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Date of creation: 2008
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Handle: RePEc:red:sed008:88

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  6. Galeotti, Marzio & Schiantarelli, Fabio, 1998. "The Cyclicality of Markups in a Model with Adjustment Costs: Econometric Evidence for US Industry," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 60(2), pages 121-42, May.
  7. Hornstein, Andreas & Praschnik, Jack, 1997. "Intermediate inputs and sectoral comovement in the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 40(3), pages 573-595, December.
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  9. Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(8), pages 931-948, November.
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  13. 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, Elsevier, vol. 29(5), pages 847-871, May.
  14. Joaquim Oliveira Martins & Stefano Scarpetta, 2002. "Estimation of the Cyclical Behaviour of Mark-ups: A Technical Note," OECD Economic Studies, OECD Publishing, OECD Publishing, vol. 2002(1), pages 173-188.
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