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Sector-specific Markup Fluctuations and the Business Cycle

Alain Gabler ()

No ECO2007/25, Economics Working Papers from European University Institute

Abstract: The counter-cyclicality in the relative price of equipment investment which is observed in the U.S. has been attributed to equipment-specific productivity shocks. Cross-country evidence indicates that a number of countries experience sizeable delays between a surge in equipment production and a fall in its relative price, which is difficult to reconcile with sector-specific shocks. I show that in the presence of sector specific, time-varying markups, relative price movements arise as a direct consequence of consumption smoothing, even if all shocks are aggregate, while barriers to firm entry lead to delays in relative price responses. A calibrated version of the model explains around one-third of the relative price fluctuations which are observed in the U.S., as well as the qualitative differences in the behaviour of this relative price across countries.

Keywords: endogenous markups; firm entry and exit; relative prices (search for similar items in EconPapers)
JEL-codes: D43 E25 E32 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge and nep-mac
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