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Income dispersion and counter-cyclical markups

Chris Edmond and Laura Veldkamp

Journal of Monetary Economics, 2009, vol. 56, issue 6, 791-804

Abstract: 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, idiosyncratic 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 and long-run patterns of standard business cycle aggregates.

Keywords: Business; cycles; Markups; Income; dispersion (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (27)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:56:y:2009:i:6:p:791-804

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