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Estimating the Price Markup in the New Keynesian Model

Martin M. Andreasen () and Mads Dang ()
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Martin M. Andreasen: Aarhus University and CREATES and The Danish Finance Institute, Postal: Department of Economics and Business Economics, Fuglesangs Alle 4, 8210 Aarhus V
Mads Dang: Aarhus University and CREATES, Postal: Department of Economics and Business Economics, Fuglesangs Alle 4, 8210 Aarhus V

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper shows that the price demand elasticity can be estimated reliably in a standard log-linearized version of the New Keynesian model when including firm profit as an observable in the estimation. Using this identification strategy for the post-war US economy, we find an estimated price demand elasticity of 2.58 with a tight standard error of 0.31. This corresponds to an average price markup of 63% with a 95% confidence interval of [39%, 88%]. We also show that a calibrated markup of 20%, as commonly used in the literature, is rejected by the data, because it generates too much variability in firm profit.

Keywords: Aggregate supply curve; Identification; Likelihood inference; New Keynesian model; Price markup (search for similar items in EconPapers)
JEL-codes: C10 E12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2019-03-01
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