FRB: Markup Variation and Endogenous Fluctuations in the Price of Investment Goods

International Finance Discussion Papers

Markup Variation and Endogenous Fluctuations in the Price of Investment Goods
Max Floetotto, Nir Jaimovich, and Seth Pruitt
2009-968 (March 2009)

Abstract: The two sector model presented in this note suggests a simple structural decomposition of movements in the price of investment goods into exogenous and endogenous sources. The endogenous fluctuations arise in the presence of countercyclical markups which vary differently across the consumption and investment sectors. In turn, the movements in the markups are due to endogenous procyclical net business formation. The model, while being consistent with the countercyclicality of the price of investment goods, suggests that about a quarter of the movement in the price series can be attributed to this endogenous mechanism.

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Keywords
Price of investment, business cycle, firm dynamics, markup

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Last update: March 31, 2009