Income Dispersion and Counter-Cyclical Markups
New York University - Stern School of Business; National Bureau of Economic Research (NBER)
New York University
NYU Working Paper No. 2451/26075
We construct a model of counter-cyclical markups based on cyclical variation inthe dispersion of income across agents. The model is neoclassical in most respects, with monopolistically competitive firms facing a distribution of buyers that changes through time. Income dispersion is high during recessions, which reduces the price elasticity of demand and increases markups applied by firms. Using recent estimates ofcounter-cyclical income dispersion, we calibrate the model and show that it generates realistic markups as well as other salient features of business cycles.
Number of Pages in PDF File: 34
Keywords: business cycles, counter-cyclical markups, income dispersionworking papers series
Date posted: October 13, 2008
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