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Title: Cyclicality and Heterogeneity of Price Markup
Authors: Hong, Sungki
Advisors: Itskhoki, Oleg
Contributors: Economics Department
Keywords: business cycle
Subjects: Economics
Issue Date: 2017
Publisher: Princeton, NJ : Princeton University
Abstract: This dissertation studies the importance of firm-level price markup dynamics for business cycle fluctuations. In chapter one, I use recent IO techniques to measure the behavior of markups over the business cycle at the firm level. I find that markups are countercyclical with an average elasticity of -0.9 with respect to real GDP, in line with the earlier industry-level evidence. Importantly, I find substantial heterogeneity in markup cyclicality across firms, with small firms having significantly more countercyclical markups than large firms. In chapter two, I examine if two prominent models in the literature are consistent with the empirical findings. First, I explore the Atkeson and Burstein (2008) model of oligopolistic competition. Coupled with an exogenous second-moment shock to firm productivities, this model results in a countercyclical average markup, but predicts that smaller firms reduce their markups in recessions. Second, I calibrate both Calvo and menu cost models of price stickiness to match the empirical heterogeneity in price durations as in Goldberg and Hellerstein (2011). I find that both models can match the average counter-cyclicality of markups in response to monetary shocks. Quantitatively, however, only the menu cost model, through its selection effect, can match the extent of the empirical heterogeneity in markup cyclicality. In addition, both sticky price models imply pro-cyclical markup behavior in response to productivity shocks. In chapter three, I develop a new general equilibrium model that embeds customer capital into a standard firm dynamics model with entry and exit. A key feature of the model is that a firm's decision about markups becomes dynamic -- firms accumulate customer capital in the periods of fast growth by charging low markups, and choose to exploit it by charging high markups in the downturns. In particular, during recessions, the endogenous higher exit probability for smaller firms implies that they place lower weight on future profits, leading them to charge higher markups. This mechanism serves to endogenously increase the dispersion of firm sales and employment in recessions. Also, the resulting input misallocation amplifies both the volatility and persistence of the exogenous productivity shocks driving the business cycle.
Alternate format: The Mudd Manuscript Library retains one bound copy of each dissertation. Search for these copies in the library's main catalog:
Type of Material: Academic dissertations (Ph.D.)
Language: en
Appears in Collections:Economics

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