Demand, Supply and Markup Fluctuations
FEUNL Working Paper Series nº 609
53 Pages Posted: 9 Nov 2016
There are 3 versions of this paper
Demand, Supply and Markup Fluctuations
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: Suggested Citation