Demand, Markups and the Business Cycle. Bayesian Estimation and Quantitative Analysis in Closed and Open Economies
Lilia Cavallari () and
Federico Etro ()
No 2017:09, Working Papers from Department of Economics, University of Venice "Ca' Foscari"
We generalize the demand side of a Real Business Cycle model introducing non-homothetic preferences over differentiated final goods. Under monopolistic competition this generates variable markups that depend on the level of consumption. We estimate a flexible preference specification through Bayesian methods and obtain countercyclical markups. The associated closed-economy model magnifies the propagation of shocks (compared to perfect competition or fixed markups) 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 reduces its markups and improves its terms of trade, which promotes consumption in the Home country but also production in the Foreign country to exploit the increased profitability of exports.
Keywords: RBC; variable markups; non-homothetic preferences; international macroeconomics (search for similar items in EconPapers)
JEL-codes: E1 E2 E3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-int and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://www.unive.it/pag/fileadmin/user_upload/dipa ... llari_etro_09_17.pdf First version, anno (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ven:wpaper:2017:09
Access Statistics for this paper
More papers in Working Papers from Department of Economics, University of Venice "Ca' Foscari" Contact information at EDIRC.
Bibliographic data for series maintained by Geraldine Ludbrook ().