Working Paper: CEPR ID: DP3100
Authors: Daniel Cohen; Emmanuel Farhi
Abstract: The Paper highlights one critical difference between Europe and the US regarding the Phillips curve: the behaviour of prices. While they are quickly restored to an equilibrium level in the US, European prices are driven by highly counter-cyclical mark-ups. In bad times, European firms manage to keep their price high relative to cost, while their US counterparts are pressed into cuts and discounts of various forms. We show that this behaviour is the critical reason why Phillips curve look different across the Atlantic, much more than because of differences arising on the labour markets.
Keywords: labour market; markup; Phillips curve
JEL Codes: E24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| countercyclical markups in Europe (N14) | differences in price behavior between Europe and the US (P22) |
| differences in price behavior between Europe and the US (P22) | divergence in observed Phillips curves (E31) |
| price-setting behaviors of firms (L11) | differences in market dynamics between Europe and the US (F61) |
| labor market differences (J49) | variations in Phillips curves (E31) |