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Uncertainty-driven business cycles: assessing the markup channel

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  • Born, Benjamin
  • Pfeifer, Johannes

Abstract

A growing recent literature relies on a precautionary pricing motive embedded in representative agent DSGE models with sticky prices and wages to generate negative output effects of uncertainty shocks. We assess whether this theoretical model channel is consistent with the data. Building a New Keynesian model, we show that indeed with sufficient nominal rigidities markups increase and output falls after uncertainty shocks. The model is also used as a business cycle accounting device to construct aggregate markups from the data. Time-series techniques are employed to study the conditional comovement between markups and output in the data. Consistent with the model's precautionary wage setting, we find that wage markups increase after uncertainty shocks. Price markups in contrast fall. This finding - inconsistent with the model - is corroborated by industry-level data. Overall, these results point to a prominent role for sticky wages in the transmission of uncertainty shocks.

Suggested Citation

  • Born, Benjamin & Pfeifer, Johannes, 2017. "Uncertainty-driven business cycles: assessing the markup channel," CEPR Discussion Papers 11745, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11745
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    Cited by:

    1. Grzegorz Długoszek, 2018. "Macroeconomic Effects of Financial Uncertainty," 2018 Meeting Papers 1128, Society for Economic Dynamics.
    2. Fasolo, Angelo Marsiglia, 2019. "Monetary policy volatility shocks in Brazil," Economic Modelling, Elsevier, vol. 81(C), pages 348-360.
    3. Meinen, Philipp & Roehe, Oke, 2018. "To sign or not to sign? On the response of prices to financial and uncertainty shocks," Economics Letters, Elsevier, vol. 171(C), pages 189-192.
    4. Qazi Haque & Leandro M. Magnusson, 2020. "Uncertainty shocks and inflation dynamics in the US," CAMA Working Papers 2020-100, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    5. Bachmann, Rüdiger & Born, Benjamin & Elstner, Steffen & Grimme, Christian, 2019. "Time-varying business volatility and the price setting of firms," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 82-99.
    6. Kim, Wongi, 2019. "Government spending policy uncertainty and economic activity: US time series evidence," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    7. Caggiano, Giovanni & Castelnuovo, Efrem & Pellegrino, Giovanni, 2017. "Estimating the real effects of uncertainty shocks at the Zero Lower Bound," European Economic Review, Elsevier, vol. 100(C), pages 257-272.
    8. Ignacio Lozano-Espitia & Fernando Arias-Rodríguez & Jesus Bejarano & Andres Gonzalez & Clark Granger-Castaño & Franz Hamann & Yurany Hernández-Turca & Juan Manuel Julio-Román & Martha López & Juan C. , 2019. "La política fiscal y la estabilización macroeconómica en Colombia," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, issue 90, pages 1-60, April.
    9. Meinen, Philipp & Roehe, Oke, 2017. "On measuring uncertainty and its impact on investment: Cross-country evidence from the euro area," European Economic Review, Elsevier, vol. 92(C), pages 161-179.
    10. Ignacio Lozano-Espitia & Fernando Arias-Rodríguez, Jesus Bejarano & Andres Gonzalez, Clark Granger-Castaño & Franz Hamann, Yurany Hernández-Turca & Juan Manuel Julio-Román, Martha López & Juan C. Mend, 2019. "La política fiscal y la estabilización macroeconómica en Colombia," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República - ESPE, issue 90, pages 1-60, April.

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    More about this item

    Keywords

    price markup; Uncertainty shocks; wage markup;
    All these keywords.

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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