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Income Dispersion and Counter-Cyclical Markups

  • Chris Edmond
  • Laura Veldkamp

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, heterogeneous 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, long-run and cross-state patterns of standard business cycle aggregates.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14452.

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Date of creation: Oct 2008
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Publication status: published as 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:nbr:nberwo:14452
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