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Customer Capital, Markup Cyclicality, and Amplification

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  • Sungki Hong

Abstract

This paper studies the importance of firm-level price markup dynamics for business cycle fluctuations. Using state-of-the-art IO techniques to measure the behavior of markups over the business cycle at the firm level, I find that markups are countercyclical with an average elasticity of -1.1 with respect to real GDP. Importantly, I find substantial heterogeneity in markup cyclicality across firms, with small firms having significantly more counter-cyclical markups than large firms. Then, I develop a general equilibrium model by embedding customer capital (due to deep habits as in Ravn, Schmitt-Grohe, and Uribe, 2006) into a standard Hopenhayn (1992) model of firm dynamics with entry and exit. The calibrated model replicates these empirical facts and produces counter-cyclical firm sales dispersions consistent with the data. The resulting input misallocation amplifies both the volatility and persistence of the aggregate productivity shocks driving the business cycle.

Suggested Citation

  • Sungki Hong, 2017. "Customer Capital, Markup Cyclicality, and Amplification," Working Papers 2017-33, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2017-033
    DOI: 10.20955/wp.2017.033
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    Cited by:

    1. Maria Garrone & Jo Swinnen, 2018. "Mark-up volatility in Food Value Chains: Evidence from France and Italy," Working Papers of LICOS - Centre for Institutions and Economic Performance 626586, KU Leuven, Faculty of Economics and Business (FEB), LICOS - Centre for Institutions and Economic Performance.
    2. Dudley Cooke & Tatiana Damjanovic, 2017. "The Macroeconomic Implications of Firm Selection," Discussion Papers 1709, University of Exeter, Department of Economics.
    3. Carlos Santos & Luis F. Costa & Paulo Brito, 2016. "Demand, supply and markup fluctuations," FEUNL Working Paper Series wp609, Universidade Nova de Lisboa, Faculdade de Economia.
    4. Pau Roldán & Sonia Gilbukh, 2018. "Firm dynamics and pricing under customer capital accumulation," Working Papers 1838, Banco de España;Working Papers Homepage.

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    More about this item

    Keywords

    Business Cycle; Customer Capital; Entry and Exit; Markup Cyclicality;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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