NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Cyclical Behavior of the Price-Cost Markup

Christopher J. Nekarda, Valerie A. Ramey

NBER Working Paper No. 19099
Issued in June 2013
NBER Program(s):   EFG   ME

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.

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Document Object Identifier (DOI): 10.3386/w19099

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