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Sticky Prices, Markup and the Business Cycle: Some Evidence

  • Giovanni Lombardo

In this paper we provide empirical evidence of a positive correlation between the degree of competition and the persistence of the deviation of real output from trend. Under the assumption of imperfect competition and sticky prices we simulate a simple dynamic general equilibrium model to derive the theoretical correlation between competition and persistence. We then use a panel of 24 OECD countries to estimate the correlation between a measure of the markup and a measure of persistence. The markup is measured using the observed unit labour cost. On the basis of our theoretical results, we find it easier to believe that the observed unit labour cost does indeed reflect the size of the markup. Our result is consistent with existing microeconomic evidence on the relationship between competition and price rigidity.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 01/06.

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Handle: RePEc:yor:yorken:01/06
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  1. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
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  8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  9. Robert J. Barro & Silvana Tenreyro, 2000. "Closed and Open Economy Models of Business Cycles with Marked Up and Sticky Prices," NBER Working Papers 8043, National Bureau of Economic Research, Inc.
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  15. Kiley, Michael T, 2000. "Endogenous Price Stickiness and Business Cycle Persistence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 28-53, February.
  16. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  17. Galí, Jordi & Gertler, Mark & López-Salido, J David, 2001. "European Inflation Dynamics," CEPR Discussion Papers 2684, C.E.P.R. Discussion Papers.
  18. Bergin, Paul R. & Feenstra, Robert C., 2000. "Staggered price setting, translog preferences, and endogenous persistence," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 657-680, June.
  19. Basu, Susanto, 1995. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," American Economic Review, American Economic Association, vol. 85(3), pages 512-31, June.
  20. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
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  26. repec:cup:macdyn:v:4:y:2000:i:1:p:74-107 is not listed on IDEAS
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