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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. Lombardo, Giovanni, 2002. "Price rigidity, the mark-up and the dynamics of the current account," Discussion Paper Series 1: Economic Studies 2002,14, Deutsche Bundesbank, Research Centre.
  2. Jordi Gali & Mark Gertler & J. David Lopez-Salido, 2001. "European Inflation Dynamics," NBER Working Papers 8218, National Bureau of Economic Research, Inc.
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  4. Farmer, R.E.A., 1999. "Two New Keynesian Theories of Sticky Prices," Economics Working Papers eco99/33, European University Institute.
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  8. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September.
  9. John M. Roberts, 2001. "How well does the New Keynesian sticky-price model fit the data?," Finance and Economics Discussion Series 2001-13, Board of Governors of the Federal Reserve System (U.S.).
  10. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
  11. 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.
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  13. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  14. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135 Elsevier.
  15. Neiss, Katharine S, 1999. "Discretionary Inflation in a General Equilibrium Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 357-74, August.
  16. Michael T. Kiley, 1996. "Endogenous price stickiness and business cycle persistence," Finance and Economics Discussion Series 96-23, Board of Governors of the Federal Reserve System (U.S.).
  17. 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.
  18. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond.
  19. Sbordone, Argia M., 2002. "Prices and unit labor costs: a new test of price stickiness," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 265-292, March.
  20. Roger E.A. Farmer, 1990. "Sticky Prices," UCLA Economics Working Papers 588, UCLA Department of Economics.
  21. Javier Coto-Martinez & Huw Dixon, . "Fiscal Policy in an Imperfectly Competitive Dynamic Small Open Economy," Discussion Papers 99/19, Department of Economics, University of York.
  22. Katharine S. Neiss, 2001. "The markup and inflation: evidence in OECD countries," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 570-587, May.
  23. 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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  26. repec:cup:macdyn:v:4:y:2000:i:1:p:74-107 is not listed on IDEAS
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