TY  - JOUR
AU  - Rotemberg,Julio J.
AU  - Woodford,Michael
TI  - The Cyclical Behavior of Prices and Costs
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6909
PY  - 1999
Y2  - January 1999
UR  - http://www.nber.org/papers/w6909
L1  - http://www.nber.org/papers/w6909.pdf
N1  - Author contact info:
Julio J. Rotemberg
Graduate School of Business
Harvard University, Morgan Hall
Soldiers Field
Boston, MA  02163
Tel: 617/495-1015
Fax: 617/496-5994
E-Mail: jrotemberg@hbs.edu

Michael Woodford
Department of Economics
Columbia University
420 W. 118th Street
New York, NY 10027
Tel: 212/854-1094
Fax: 212-854-8059
E-Mail: mw2230@columbia.edu
AB  - 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.
ER  -