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Closed and open economy models of business cycles with marked up and sticky prices

By Robert J. Barro and Silvana Tenreyro

Abstract

Shifts in the extent of competition, which affect markups, are possible sources of aggregate fluctuations. Markups are countercyclical; during booms the economy operates more efficiently. In our benchmark model, markups correspond to the prices of differentiated inputs relative to that of undifferentiated final product. If nominal prices of differentiated goods are relatively sticky, unexpected inflation reduces markups, mimicking the effects of increased competition. Similar effects stem from reductions in markups of foreign intermediates and unexpected inflation abroad. The models imply that prices of less competitive goods are more countercyclical. We find support for this hypothesis using data of four-digit manufacturing industries

Topics: HB Economic Theory
Publisher: Blackwell
Year: 2006
DOI identifier: 10.1111/j.1468-0297.2006.01087.x
OAI identifier: oai:eprints.lse.ac.uk:4986
Provided by: LSE Research Online
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