Location of Repository

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 markup ratios, are possible sources of aggregate business fluctuations. Markups are countercyclical, and booms are times at which the economy operates more efficiently. We begin with a real model in which markup ratios correspond to the prices of differentiated intermediate inputs relative to the price of undifferentiated fmal product. If the nominal prices of the differentiated goods are relatively sticky, then unexpected inflation reduces the relative price of intermediates and thereby mimics the output effects from an increase in competition. In an open economy, domestic output is stimulated by reductions in the relative price of foreign intermediates and, therefore, by unexpected inflation abroad. The various versions ofthe model imply that the relative prices of less competitive goods move countercyclically. We find support for this hypothesis from price data of four-digit manufacturing industries

Topics: HB Economic Theory
Publisher: National Bureau of Economic Research
Year: 2000
OAI identifier: oai:eprints.lse.ac.uk:5308
Provided by: LSE Research Online
Download PDF:
Sorry, we are unable to provide the full text but you may find it at the following location(s):
  • http://www.nber.org (external link)
  • http://eprints.lse.ac.uk/5308/ (external link)
  • Suggested articles


    To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.