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Demand, Markups and the Business Cycle

Lilia Cavallari () and Federico Etro ()

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: We generalize the demand side of a Real Business Cycle model introducing non-homothetic preference aggregators over differentiated final goods. Under monopolistic competition this generates markups which vary with consumption. We estimate a flexible preference specification through Bayesian methods and obtain substitutability across goods increasing with consumption. The closed-economy model magnifies the propagation of shocks through additional substitution effects on labor supply and consumption. In an open-economy framework, it also generates positive comovements of output, labor and investment and reduces consumption correlation between countries. In particular, a positive shock in the Home country improves its terms of trade, which promotes consumption in the Home country but also production in the Foreign country.

Keywords: RBC; non-homothetic preference aggregators; variable markups; international macroeconomics. (search for similar items in EconPapers)
JEL-codes: E1 E2 E3 F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2018
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