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Sector-specific Markup Fluctuations and the Business Cycle
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1725-6704
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EUI ECO; 2007/25
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GABLER, Alain, Sector-specific Markup Fluctuations and the Business Cycle, EUI ECO, 2007/25 - https://hdl.handle.net/1814/7165
Abstract
The counter-cyclicality in the relative price of equipment investment
which is observed in the U.S. has been attributed to equipment-specific pro-
ductivity shocks. Cross-country evidence indicates that a number of coun-
tries experience sizeable delays between a surge in equipment production
and a fall in its relative price, which is dfficult to reconcile with sector-
specific shocks. I show that in the presence of sector specific, time-varying
markups, relative price movements arise as a direct consequence of con-
sumption smoothing, even if all shocks are aggregate, while barriers to firm
entry lead to delays in relative price responses. A calibrated version of the
model explains around one-third of the relative price
fluctuations which are
observed in the U.S., as well as the qualitative differences in the behaviour
of this relative price across countries.