Demand, Supply and Markup Fluctuations

FEUNL Working Paper Series nº 609

53 Pages Posted: 9 Nov 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; UECE (Research Unit on Complexity and Economics)

Paulo B. Brito

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

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Date Written: October 13, 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 pro-cyclical if the markup is obtained using the labour share instead of intermediate inputs. Adjustment costs create a wedge between the labour 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 13, 2016). FEUNL Working Paper Series nº 609, Available at SSRN: https://ssrn.com/abstract=2866852 or http://dx.doi.org/10.2139/ssrn.2866852

Carlos Daniel Santos (Contact Author)

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

Campus de Campolide
Lisbon, 1099-032
Portugal

Luís Filipe Pereira da Costa

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://www.iseg.ulisboa.pt/~lukosta

UECE (Research Unit on Complexity and Economics)

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

HOME PAGE: http://www.iseg.utl.pt/~uece/

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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