Price Decomposition and Asymmetry in Various Regimes of the Economy

39 Pages Posted: 19 Jul 2021 Last revised: 23 Aug 2021

See all articles by Demetris Koursaros

Demetris Koursaros

Cyprus University of Technology - Department of Commerce

Nektarios Michail

Cyprus University of Technology

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping

Date Written: July 15, 2021

Abstract

This paper decomposes price into its 2 major constituents, namely markup (Mkp) and marginal cost (MC) with which a Markov-switching VAR with fixed transition probabilities is estimated. Since the proposed pair of variables has not been extensively analysed, a theoretical model that derives markups and marginal costs as functions of parameters and shocks is developed to extract identifying restrictions for the VAR. In the empirical exercise, a non-linear representation of GIRFs is obtained that allows the analysis of 3 different regimes the economy enters and observe any potential sign or size asymmetries in the responses for each regime. We document that due to the opposite movement of Mkp and Mc in all regimes, inflation is less volatile in the recessionary state than in the expansionary state. In addition, we find that larger shocks have a lower (as % of the magnitude of the shock) and less persistent effect on inflation than shocks of a lower magnitude.

Keywords: markup, marginal cost, Markov-switching, GIRF, asymmetry, inflation

JEL Classification: E10, E31, C01, C22

Suggested Citation

Koursaros, Demetris and Michail, Nektarios and Savva, Christos S., Price Decomposition and Asymmetry in Various Regimes of the Economy (July 15, 2021). Available at SSRN: https://ssrn.com/abstract=3887471 or http://dx.doi.org/10.2139/ssrn.3887471

Demetris Koursaros (Contact Author)

Cyprus University of Technology - Department of Commerce ( email )

Pavlou Mela
Limassol
Cyprus

Nektarios Michail

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping ( email )

Limassol, 3603
Cyprus
00357252349 (Phone)
00357252674 (Fax)

HOME PAGE: http://www.csavva.com

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