The Cyclicality of Markups in a Model with Adjustment Costs: Econometric Evidence for US Industry

Marzio Galeotti and Fabio Schiantarelli

Oxford Bulletin of Economics and Statistics, 1998, vol. 60, issue 2, 121-42

Abstract: In this paper, the authors investigate the impact of demand fluctuations on market power in U.S. manufacturing industries. They impose on a model with adjustment costs the minimum structure necessary to recover a measure of markups. Markups are allowed to vary with both the state and future evolution of demand and estimates of price-cost margins are obtained from the Euler equation for capital. The authors conduct the empirical investigation for U.S. two-digit manufacturing industries using annual data covering the 1952-85 period. They find that markups are inversely related to current demand. However, given the state of demand, they vary directly with expectations of future demand changes. Copyright 1998 by Blackwell Publishing Ltd

Date: 1998
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