Demand, Supply and Markup Fluctuations

NOVA SBE Working Paper No. 609

53 Pages Posted: 19 Oct 2016

See all articles by Carlos Daniel Santos

Carlos Daniel Santos

New University of Lisbon - Nova School of Business and Economics

Luís F. Costa

ISEG - Lisbon School of Economics & Management of Universidade de Lisboa; REM - Research in Economics and Mathematics; UECE - Research Unit on Complexity and Economics

Paulo B. Brito

Technical University of Lisbon - School of Economics and Management and UECE

Multiple version iconThere are 3 versions of this paper

Date Written: October 17, 2016

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 labor share instead of intermediate inputs. Adjustment costs create a wedge between the labor share and the actual markup which explain the observed correlations.

Keywords: Markups, Demand Shocks, TFP shocks

JEL Classification: C23, E32, L16, L22

Suggested Citation

Santos, Carlos Daniel and Costa, Luís Filipe Pereira da and Brito, Paulo B., Demand, Supply and Markup Fluctuations (October 17, 2016). NOVA SBE Working Paper No. 609, Available at SSRN: https://ssrn.com/abstract=2853657 or http://dx.doi.org/10.2139/ssrn.2853657

Carlos Daniel Santos

New University of Lisbon - Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

Luís Filipe Pereira da Costa (Contact Author)

ISEG - Lisbon School of Economics & Management of Universidade de Lisboa ( email )

Rua do Quelhas, 6
Lisboa, 1200-781
Portugal
+351 213 925 981 (Phone)
+351 213 922 808 (Fax)

HOME PAGE: http://https://www.iseg.ulisboa.pt/faculty/luis-costa/

REM - Research in Economics and Mathematics ( email )

ISEG, Universidade de Lisboa
Rua Miguel Lupi, 20
Lisboa, 1249-078
Portugal

HOME PAGE: http://https://www.iseg.ulisboa.pt/faculty/luis-costa/

UECE - Research Unit on Complexity and Economics

ISEG, U. Lisboa
Rua Miguel Lupi, 20
Lisboa, 1249-078
Portugal
+351-213 925 912 (Phone)
+351-213 971 196 (Fax)

HOME PAGE: http://https://uece.rc.iseg.ulisboa.pt/

Paulo B. Brito

Technical University of Lisbon - School of Economics and Management and UECE ( email )

ISEG-UTL
R.Miguel Lupi, 20
Lisbon, 1249-078
Portugal

HOME PAGE: http://pascal.iseg.utl.pt/~pbrito/

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