A reinvestigation of the markup and the business cycle

Abstract:Several small open economies switched to inflation targeting during the 1990s, thereby giving up various forms of exchange rate targeting in favour of flexible exchange rates. Norway did the same early in 2001, and has thereafter experienced highly varying nominal exchange rates with consumer price inflation dropping far below the target during 2003 and 2004. Knowledge of the degree of exchange rate pass-through to import prices and further to consumer prices is essential for inflation targeting. The literature suggests that pass-through is greater to import prices than to consumer prices, which presumably is related to the role of distributors in the economy. We present empirical evidence on these issues for Norway by estimating import price equations and a dynamic model of the distributors pricing behaviour. Using a large-scale macroeconometric model of the Norwegian economy, we find exchange rate pass-through to import prices to be quite rapid in the short run, while pass-through to consumer prices seems to be modest. We show that, among the numerous channels through which the exchange rate operate, trade margins in the distribution sector act as cushions to exchange rate fluctuations, thereby being one of the main important source for the delay in pass-through. In spite of moderate pass-through to consumer prices, we find inflationary effects of exchange rate changes even in the short run, an insight important for inflation targeting central banks.

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“…Bénabou (1992), Blanchard and Muet (1993), Bowitz and Cappelen (2001) and Banerjee and Russell (2004).…”

Section: The Distribution Sector 12mentioning

confidence: 99%

Exchange Rate Pass-through in a Small Open Economy: the Importance of the Distribution Sector

2013

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“…Thus, to compute    and   we use the FBBVA-IVIE database for Spain and, the NIPA (National Income and Product Accounts) for the U.S. 4 As a measure of the annual interest rate, for Spain we use the nominal long-term interest rate on government bonds, while for the U.S. we use the Federal Funds rate. 5 Finally, for   we use the GDP deflator.…”

Section: The Price Markupmentioning

confidence: 99%

“…We calibrate the parameters as follows. First of all, we use the estimated values of , the average values of  and , and the computed values of the price markup for Spain and the U.S. To obtain efficiency units of labor we compute the Solow residual from an accounting exercise based on equation (5). We take into account that the Solow residual is affected by the price markup (Hall, 1988).…”

Section: Numerical Simulationmentioning

confidence: 99%

“…Rather than checking the relative incidence of the price markup and capital deepening on the LIS trajectory, we have now developed a model in which capital accumulation is explained. By equation (20), this requires the use of Solow's residual, as computed by equation (5), which is time-varying and entails the need to pay attention to both the trend and cyclical components of the series. This is the reason why we do not filter the series under scrutiny.…”

Section: Numerical Simulationmentioning

confidence: 99%

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Factor shares, the price markup, and the elasticity of substitution between capital and labor

Raurich

Sala

Sorolla

2012

Journal of Macroeconomics

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“…Sanchez (2008). Empirical evidence further suggests that markups are countercyclical (Banerjee and Russell, 2004;Wilson and Reynolds, 2005;Jaimovich, 2006).…”

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confidence: 99%

Dirty History Versus Clean Expectations: Can Energy Policies Provide Momentum for Growth?

Bretschger

Schaefer

2016

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe study the impact of economic policy on the importance of history and expectations for the macroeconomic performance of an economy. In our model the energy mix is based on the conversion of heterogeneous energy sources. Markups over marginal costs are endogenous so that the marginal revenue product of capital becomes non-monotonic in capital. We derive multiple steady states and identify regions in which initial conditions are insufficient as a selection criterion for development. In these situations, pure expectations determine the equilibrium selection process which is crucial for long-run performance. Energy policy affects the interplay between history and expectations by shifting the region where expectations matter and by affecting the location of the equilibria in the dirty and the clean economy. We find that taxes and subsidies should be used simultaneously to guide an energy transition. We argue that expectations and momentum effects are important for the energy transition because they decrease policy costs and thus raise political acceptance.

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A reinvestigation of the markup and the business cycle

Cited by 15 publications

References 37 publications

Exchange Rate Pass-through in a Small Open Economy: the Importance of the Distribution Sector

Exchange Rate Pass-through in a Small Open Economy: the Importance of the Distribution Sector

Factor shares, the price markup, and the elasticity of substitution between capital and labor

Dirty History Versus Clean Expectations: Can Energy Policies Provide Momentum for Growth?

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