The Cyclical Behavior of the Markups in the New Keynesian Models

Nlemfu Mukoko, Jean Blaise (2015): The Cyclical Behavior of the Markups in the New Keynesian Models.

Abstract

Different methods have been used in the literature to mesure and analyze price markup cyclical behavior. We use a medium-scale DSGE Model with positive trend in ation, in which aggregate fluctuations are driven by neutral technology, marginal efficiency of investment (MEI) and monetary policy shocks and, where both price and wage markups vary. We find that when raising trend inflation from 0 to 4 percent, wage markup is more important than price markup in explaining the dynamics effects of shocks. Thus, the interactions between positive trend inflation and MEI shocks have greater cyclical effects on wage markup than on price markup. These results put into question the focus on the price markup cyclicality in the literature which ignore the implications of trend inflation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Markups, cyclicality, New Keynesian Models
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles

References

Amano, R., Ambler, S. and Rebei, N. (2007), `The macroeconomic eeffects of non-zero trend inflation', Journal of Money, Credit and Banking 39(7), 1821-1838.

Amano, R., Moran, K., Murchison, S. and Rennison, A. (2009), `Trend inflation, wage and price rigidities, and productivity growth', Journal of Monetary Economics 56(3), 353-364.

Ascari, G. (2004), `Staggered prices and trend inflation: some nuisances', Review of Economic dynamics 7(3), 642-667.

Ascari, G., Phaneuf, L. and Sims, E. (2015), On the welfare and cyclical implications of moderate trend inflation, Technical report, National Bureau of Economic Research.

Ascari, G. and Sbordone, A. M. (2014), `The macroeconomics of trend inflation', Journal of Economic Literature 52(3), 679-739.

Barattieri, A., Basu, S. and Gottschalk, P. (2010), Some evidence on the importance of sticky wages, Technical report, National Bureau of Economic Research.

Basu, S. (1995), `Intermediate goods and business cycles: Implications for productivity and welfare', The American Economic Review pp. 512-531.

Basu, S. and Kimball, M. S. (1997), Cyclical productivity with unobserved input variation, Technical report, National Bureau of Economic Research.

Bils, M. (1987), `The cyclical behavior of marginal cost and price', The American Economic Review pp. 838-855.

Bils, M. and Kahn, J. A. (2000), `What inventory behavior tells us about business cycles', American Economic Review 90(3), 458-481.

Bils, M. and Klenow, P. J. (2004), `Some evidence on the importance of sticky prices', Journal of political economy 112(5), 947-985.

Bils, M., Klenow, P. J. and Malin, B. A. (2014), Resurrecting the role of the product market wedge in recessions, Technical report, National Bureau of Economic Research.

Blanchard, O. J. (2008), The state of macro, Technical report, National Bureau of Economic Research.

Calvo, G. A. (1983), `Staggered prices in a utility-maximizing framework', Journal of monetary Economics 12(3), 383-398.

Chirinko, R. S. and Fazzari, S. M. (1994), `Economic fluctuations, market power, and returns to scale: Evidence from firm-level data', Journal of Applied Econometrics 9(1), 47-69.

Christiano, L. J., Eichenbaum, M. and Evans, C. L. (2005), `Nominal rigidities and the dynamic effects of a shock to monetary policy', Journal of political Economy 113(1), 1-45.

Clarida, R., Gali, J. and Gertler, M. (1999), `The science of monetary policy: A new keynesian perspective', Journal of Economic Literature 37, 1661-1707.

Domowitz, I., Hubbard, R. G. and Petersen, B. C. (1986), `Business cycles and the relationship between concentration and price-cost margins', The RAND Journal of Economics pp. 1-17.

Dotsey, M. and King, R. G. (2006), `Pricing, production, and persistence', Journal of the European Economic Association 4(5), 893-928.

El Omari, S. and Phaneuf, L. (2011), The multiplier for price stickiness, Technical report, Working Paper, Université de Québec à Montréal.

Erceg, C. J., Henderson, D. W. and Levin, A. T. (2000), `Optimal monetary policy with staggered wage and price contracts', Journal of monetary Economics 46(2), 281-313.

Fisher, J. D. (2006), `The dynamic effects of neutral and investment-specific technology shocks', Journal of political Economy 114(3), 413-451.

Fuhrer, J. C. (2000), `Habit formation in consumption and its implications for monetary-policy models', American Economic Review pp. 367-390.

Gali, J., Gertler, M. and Lopez-Salido, J. D. (2007), `Markups, gaps, and the welfare costs of business fluctuations', The review of economics and statistics 89(1), 44-59.

Goodfriend, M. and King, R. (1997), The new neoclassical synthesis and the role of monetary policy, in `NBER Macroeconomics Annual 1997, Volume 12', MIT Press, pp. 231-296.

Haskel, J., Martin, C. and Small, I. (1995), `Price, marginal cost and the business cycle', Oxford Bulletin of Economics and Statistics 57(1), 25-39.

Huang, K. X., Liu, Z. and Phaneuf, L. (2004), `Why does the cyclical behavior of real wages change over time?', American Economic Review pp. 836-856.

Justiniano, A. and Primiceri, G. (2008), `Potential and natural output', Manuscript, Northwestern University.

Justiniano, A., Primiceri, G. E. and Tambalotti, A. (2010), `Investment shocks and business cycles', Journal of Monetary Economics 57(2), 132-145.

Justiniano, A., Primiceri, G. E. and Tambalotti, A. (2011), `Investment shocks and the relative price of investment', Review of Economic Dynamics 14(1), 102-121.

Keynes, J. M. (1936), `The general theory of interest, employment and money'.

Liu, Z. and Phaneuf, L. (2007), `Technology shocks and labor market dynamics: Some evidence and theory', Journal of Monetary Economics 54(8), 2534-2553.

Morrison, C. J. (1994), `The cyclical nature of markups in canadian manufacturing: a production theory approach', Journal of Applied Econometrics 9(3), 269-282.

Nekarda, C. J. and Ramey, V. A. (2013), The cyclical behavior of the price-cost markup, Technical report, National Bureau of Economic Research.

Rotemberg, J. J. (1982), `Monopolistic price adjustment and aggregate output', The Review of Economic Studies 49(4), 517-531.

Rotemberg, J. J. and Woodford, M. (1999), `The cyclical behavior of prices and costs', Handbook of macroeconomics 1, 1051-1135.

Sbordone, A. M. (2002), `Prices and unit labor costs: a new test of price stickiness', Journal of Monetary Economics 49(2), 265-292.

Smets, F. and Wouters, R. (2003), `An estimated dynamic stochastic general equilibrium model of the euro area', Journal of the European economic association 1(5), 1123-1175.

Smets, F. and Wouters, R. (2007), `Shocks and frictions in us business cycles: A bayesian dsge approach', American Economic Review 97(3), 586-606.

Taylor, J. B. (1980), `Aggregate dynamics and staggered contracts', The Journal of Political Economy pp. 1-23.

Woodford, M. (2003), Interest and prices : Foundations of a theory of monetary policy, Technical report, Princeton, N.J. Princeton University Press.