Working Paper: NBER ID: w14452
Authors: Chris Edmond; Laura Veldkamp
Abstract: Recent advances in measuring cyclical changes in the income distribution raise new questions: How might these distributional changes affect the business cycle itself? We show how counter-cyclical income dispersion can generate counter-cyclical markups in the goods market, without any preference shocks or price-setting frictions. In recessions, heterogeneous labor productivity shocks raise income dispersion, lower the price elasticity of demand, and increase imperfectly competitive firms' optimal markups. The calibrated model explains not only many cyclical features of markups, but also cyclical, long-run and cross-state patterns of standard business cycle aggregates.
Keywords: No keywords provided
JEL Codes: E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Heterogeneous labor productivity shocks (J49) | Increased income dispersion (D31) |
| Increased income dispersion (D31) | Lower price elasticity of demand (D12) |
| Lower price elasticity of demand (D12) | Higher optimal markups (D43) |
| Heterogeneous labor productivity shocks (J49) | Higher optimal markups (D43) |
| Increased income dispersion (D31) | Higher optimal markups (D43) |