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Demand, Supply and Markup Fluctuations

Carlos Santos (), Luis Costa () and Paulo Brito ()

FEUNL Working Paper Series from Universidade Nova de Lisboa, Faculdade de Economia

Abstract: 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
Date: 2016
New Economics Papers: this item is included in nep-mac
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