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Income dispersion and counter-cyclical markups

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  • Edmond, Chris
  • Veldkamp, Laura

Abstract

Recent advances in measuring cyclical changes in the income distribution raise new questions: How might these distributional changes affect the business cycle itself? We show how counter-cyclical income dispersion can generate counter-cyclical markups in the goods market, without any preference shocks or price-setting frictions. In recessions, idiosyncratic labor productivity shocks raise income dispersion, lower the price elasticity of demand, and increase imperfectly competitive firms' optimal markups. The calibrated model explains not only many cyclical features of markups, but also cyclical and long-run patterns of standard business cycle aggregates.

Suggested Citation

  • Edmond, Chris & Veldkamp, Laura, 2009. "Income dispersion and counter-cyclical markups," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 791-804, September.
    • Handle: RePEc:eee:moneco:v:56:y:2009:i:6:p:791-804
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    Cited by:

    1. Douglas Sutherland & Peter Hoeller & Balázs Égert & Oliver Röhn, 2010. "Counter-cyclical Economic Policy," OECD Economics Department Working Papers 760, OECD Publishing.
    2. Sungki Hong, 2017. "Customer Capital, Markup Cyclicality, and Amplification," Working Papers 2017-33, Federal Reserve Bank of St. Louis.
    3. Mathä, Thomas Y. & Pierrard, Olivier, 2011. "Search in the product market and the real business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1172-1191, August.
    4. Cociuba, Simona E. & Ramanarayanan, Ananth, 2019. "International risk sharing with endogenously segmented asset markets," Journal of International Economics, Elsevier, vol. 117(C), pages 61-78.
    5. Yossi Spiegel & Konrad O. Stahl, 2014. "Industry Structure and Pricing over the Business Cycle," CESifo Working Paper Series 4848, CESifo.
    6. Matveenko, Andrei, 2020. "Logit, CES, and rational inattention," Economics Letters, Elsevier, vol. 186(C).
    7. Balázs Égert & Douglas Sutherland, 2014. "The Nature of Financial and Real Business Cycles: The Great Moderation and Banking Sector Pro-Cyclicality," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(1), pages 98-117, February.
    8. Robert E. Hall, 2009. "By How Much Does GDP Rise If the Government Buys More Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 183-249.
    9. Chaieb, Ines & Mazzotta, Stefano, 2013. "Unconditional and conditional exchange rate exposure," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 781-808.
    10. Brian C. Albrecht & Tom Phelan & Nick Pretnar, 2023. "Time Use and the Efficiency of Heterogeneous Markups," Working Papers 23-28, Federal Reserve Bank of Cleveland.
    11. Antonella Tutino & Anton Cheremukhin, 2012. "Asymmetric Firm Dynamics under Rational Inattention," 2012 Meeting Papers 161, Society for Economic Dynamics.
    12. Keqiang Hou & Alok Johri, 2009. "Intangible Capital, Corporate Earnings and the Business Cycle," Department of Economics Working Papers 2009-17, McMaster University.
    13. Navarro, Lucas, 2009. "Employment dynamics and crises in Latin America," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    14. Marco Cornia & Kristopher S. Gerardi & Adam Hale Shapiro, 2010. "Consumer Heterogeneity and Markups over the Business Cycle: Evidence from the Airline Industry," BEA Working Papers 0056, Bureau of Economic Analysis.
    15. Robert E. Hall, 2012. "The Cyclical Response of Advertising Refutes Counter-Cyclical Profit Margins in Favor of Product-Market Frictions," NBER Working Papers 18370, National Bureau of Economic Research, Inc.
    16. Sungki Hong, 2019. "Customer Capital, Markup Cyclicality, and Amplification," 2019 Meeting Papers 959, Society for Economic Dynamics.
    17. John Leahy, 2011. "A Survey of New Keynesian Theories of Aggregate Supply and Their Relation to Industrial Organization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s1), pages 87-110, August.
    18. Andrea Colciago & Rajssa Mechelli, 2020. "Competition and Inequality," Working Papers 689, DNB.
    19. Tan, Serene, 2022. "Income inequality and endogenous market structure under directed search," Journal of Economic Theory, Elsevier, vol. 201(C).
    20. Stahl, Konrad & Spiegel, Yossi, 2014. "Industry structure and pricing over the business cycle," CEPR Discussion Papers 10009, C.E.P.R. Discussion Papers.
    21. Osharin Alexander & Verbus Valery, 2015. "Heterogeneous consumers and market structure in a monopolistically competitive setting," EERC Working Paper Series 15/03e, EERC Research Network, Russia and CIS.
    22. Cheremukhin, Anton & Tutino, Antonella, 2016. "Information rigidities and asymmetric business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 142-158.
    23. Reto Foellmi & Josef Zweimüller, 2011. "Exclusive Goods and Formal-Sector Employment," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 242-272, January.
    24. Kegiang Hou & Alok Johri, 2013. "Intangible Capital and the Excess Volatility of Aggregate Profits," Department of Economics Working Papers 2013-04, McMaster University.
    25. Spiegel, Yossi & Stahl, Konrad, 2014. "Industry structure and pricing over the business cycle," ZEW Discussion Papers 14-039, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    Keywords

    Business cycles Markups Income dispersion;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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