Working Paper: NBER ID: w19099
Authors: Christopher J. Nekarda; Valerie A. Ramey
Abstract: A countercyclical markup of price over marginal cost is the key transmission mechanism for demand shocks in textbook New Keynesian (NK) models. This paper re-examines the foundation of those models. We study the cyclicality of markups in the private economy as well as in detailed manufacturing industries. First, we show that frameworks for measuring markups that have produced the strongest evidence for countercyclicality produce the opposite result when we substitute new methods and data. Second, because the NK model's predictions differ by the nature of the shock, we present evidence on the cyclicality of the markup conditional on various types of shocks. Consistent with the NK model, we find that markups are procyclical conditional on a technology shock. However, we find that they are either procyclical or acyclical conditional on demand shocks. Thus, the textbook NK explanation for the effects of government spending or monetary policy is not supported by the behavior of the markup.
Keywords: markups; macroeconomic shocks; New Keynesian models
JEL Codes: E32; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| technology shocks (D89) | markups (D43) |
| government spending shocks (E62) | markups (D43) |
| monetary policy shocks (E39) | markups (D43) |
| technology shocks (D89) | GDP (E20) |