Demand, Supply and Markup Fluctuations
Carlos Santos (),
Luis Costa () and
Paulo Brito ()
FEUNL Working Paper Series from Universidade Nova de Lisboa, Faculdade de Economia
The cyclical behavior of markups is at the center of macroeconomic debate on the origins of business-cycle fluctuations and policy effectiveness. In theory, markups may fluctuate endogenously with the business cycle due to sluggish price adjustment or to deeper motives affecting the price-elasticity of demand faced by individual producers. In this article we make use of a large firm- and product-level panel of Portuguese manufacturing firms in the 2004-2010 period. The biggest empirical challenge is to separate supply (TFP) from demand shocks. Our dataset allows to do so, by containing information on product-level prices at a yearly frequency. Furthermore, markups are mismeasured when calculated with the labor share. We use the share of intermediate inputs instead. Our main results suggest that markups are pro-cyclical with TFP shocks and generally counter-cyclical with demand shocks. We also show how markups become procyclical if the markup is obtained using the labour share instead of intermediate inputs. Adjustment costs create a wedge between the labour share and the actual markup which explain the observed correlations. JEL codes: C23, E32, L16, L22
Keywords: Markups; Demand shocks; TFP shocks (search for similar items in EconPapers)
Pages: 53 pages
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Working Paper: Demand, Supply and Markup Fluctuations (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:unl:unlfep:wp609
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