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Uncertainty-driven Business Cycles: Assessing the Markup Channel

Benjamin Born and Johannes Pfeifer

No 6303, CESifo Working Paper Series from CESifo

Abstract: A growing recent literature relies on a precautionary pricing motive embedded in representative agent DSGE models with sticky prices and wages to generate negative output effects of uncertainty shocks. We assess whether this theoretical model channel is consistent with the data. Building a New Keynesian model, we show that indeed with sufficient nominal rigidities markups increase and output falls after uncertainty shocks. The model is also used as a business cycle accounting device to construct aggregate markups from the data. Time-series techniques are employed to study the conditional comovement between markups and output in the data. Consistent with the model’s precautionary wage setting, we find that wage markups increase after uncertainty shocks. Price markups in contrast fall. This finding - inconsistent with the model - is corroborated by industry-level data. Overall, these results point to a prominent role for sticky wages in the transmission of uncertainty shocks.

Keywords: uncertainty shocks; price markup; wage markup (search for similar items in EconPapers)
JEL-codes: E01 E24 E32 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13) Track citations by RSS feed

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Related works:
Journal Article: Uncertainty‐driven business cycles: Assessing the markup channel (2021) Downloads
Working Paper: Uncertainty-driven business cycles: assessing the markup channel (2017) Downloads
Working Paper: Uncertainty-driven business cycles: assessing the markup channel (2016) Downloads
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