NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Income Dispersion and Counter-Cyclical Markups

Chris Edmond, Laura Veldkamp

NBER Working Paper No. 14452
Issued in October 2008
NBER Program(s):   EFG   ME

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.

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Published: Edmond, Chris & Veldkamp, Laura, 2009. "Income dispersion and counter-cyclical markups," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 791-804, September.

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