EconPapers    
Economics at your fingertips  
 

The Cyclical Behavior of Prices and Costs

Julio Rotemberg and Michael Woodford ()

No 6909, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Because inputs are scarce, marginal cost should be an increasing function of output. Without changes in this real marginal cost schedule, aggregate output can vary if and only if the markup of price over marginal cost varies. In this review, we discuss the extent to which observed fluctuations in aggregate economic activity depend upon such variations in average markups. We first study whether, empirically, real marginal cost rises in cyclical expansions. Average real labor cost is not very procyclical, but, for reasons such as overhead labor and adjustment costs, marginal labor cost should be more procyclical. Measures of marginal cost based on materials costs and inventories also appear procyclical. We next show that countercyclical markup variation may, depending upon how costs are modeled, account for a substantial fraction of cyclical output movements. We also show that the observed procyclical variations in productivity and profits are consistent with the hypothesis that cyclical variations in output are primarily due to markup variations than to shifts in the real marginal cost schedule. Finally, we survey theories of endogenous markup variation. These include both models of sticky and models in which firms' desired markup varies over time.

JEL-codes: E32 (search for similar items in EconPapers)
Date: 1999-01
New Economics Papers: this item is included in nep-dge
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (283) Track citations by RSS feed

Published as Handbook of Macroeconomics, Vol.1B, Taylor, J.B., and M. Woodford, eds., Amsterdam: North-Holland, 1999.

Downloads: (external link)
http://www.nber.org/papers/w6909.pdf (application/pdf)

Related works:
Chapter: The cyclical behavior of prices and costs (1999) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:6909

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w6909

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2021-07-19
Handle: RePEc:nbr:nberwo:6909