Working Paper: NBER ID: w8043
Authors: Robert J. Barro; Silvana Tenreyro
Abstract: Shifts in the extent of competition, which affect markup ratios, are possible sources of aggregate business fluctuations. Markups are countercyclical, and booms are times at which the economy operates more efficiently. We begin with a real model in which markup ratios correspond to the prices of differentiated intermediate inputs relative to the price of undifferentiated final product. If the nominal prices of the differentiated goods are relatively sticky, then unexpected inflation reduces the relative price of intermediates and thereby mimics the output effects from an increase in competition. In an open economy, domestic output is stimulated by reductions in the relative price of foreign intermediates and, therefore, by unexpected inflation abroad. The various versions of the model imply that the relative prices of less competitive goods move countercyclically. We find support for this hypothesis from price data of four-digit manufacturing industries.
Keywords: markup ratios; business cycles; sticky prices; competition; inflation
JEL Codes: E32; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| markup ratios (Y10) | business cycle fluctuations (E32) |
| competition (L13) | markup ratios (Y10) |
| markup ratios (Y10) | output and consumption (E20) |
| output and consumption (E20) | labor productivity (J24) |
| output and consumption (E20) | real wage rates (J39) |
| unexpected inflation (E31) | relative price of intermediates (F16) |
| unexpected inflation (E31) | expansionary effect (E60) |
| foreign competition (F23) | domestic output (E23) |
| unexpected inflation abroad (F31) | domestic output (E23) |
| less competitive goods (L13) | output prices (L11) |