NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Cyclical Behavior of Prices and Costs

Julio J. Rotemberg, Michael Woodford

NBER Working Paper No. 6909
Issued in January 1999
NBER Program(s):   EFG

Because inputs are scarce, marginal cost should be an increasing function of output. Without changes in this real marginal cost schedule, aggregate output can vary if and only if the markup of price over marginal cost varies. In this review, we discuss the extent to which observed fluctuations in aggregate economic activity depend upon such variations in average markups. We first study whether, empirically, real marginal cost rises in cyclical expansions. Average real labor cost is not very procyclical, but, for reasons such as overhead labor and adjustment costs, marginal labor cost should be more procyclical. Measures of marginal cost based on materials costs and inventories also appear procyclical. We next show that countercyclical markup variation may, depending upon how costs are modeled, account for a substantial fraction of cyclical output movements. We also show that the observed procyclical variations in productivity and profits are consistent with the hypothesis that cyclical variations in output are primarily due to markup variations than to shifts in the real marginal cost schedule. Finally, we survey theories of endogenous markup variation. These include both models of sticky and models in which firms' desired markup varies over time.

download in pdf format
   (4455 K)

email paper

This paper is available as PDF (4455 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6909

Published: Handbook of Macroeconomics, Vol.1B, Taylor, J.B., and M. Woodford, eds., Amsterdam: North-Holland, 1999.

Users who downloaded this paper also downloaded these:
Rotemberg and Woodford Markups and the Business Cycle
Rotemberg and Woodford w4502 Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets
Rotemberg and Woodford w6618 Interest-Rate Rules in an Estimated Sticky Price Model
Rotemberg and Woodford w3534 Cyclical Markups: Theories and Evidence
Goodfriend and King The New Neoclassical Synthesis and the Role of Monetary Policy
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us