Demand, supply and markup fluctuations

Carlos Daniel Santos, Luus F. Costa, Paulo B. Brito

Research output: Working paper

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.
Original languageEnglish
DOIs
Publication statusPublished - 2016

Publication series

NameSSRN Electronic Journal

Fingerprint Dive into the research topics of 'Demand, supply and markup fluctuations'. Together they form a unique fingerprint.

  • Cite this

    Santos, C. D., Costa, L. F., & Brito, P. B. (2016). Demand, supply and markup fluctuations. (SSRN Electronic Journal). https://doi.org/10.2139/ssrn.2866852