Thread by @efalcettoni

After some delicious lunch, we’re back at the #womeninmacro conference! Valerie Ramey from @UCSDEcon is next with her paper joint with @chrisnekarda from @federalreserve Board. Views do not represent the views of the System or other research staff members.

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@UCSDEcon @chrisnekarda @federalreserve For years, price markups were believed be me countercyclical, but some are procyclical. In New Keynesian models, price markups can be both countercyclical or procyclical, depending on the shocks.

Q: is behavior of price markups consistent with sticky-price NK models?

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The paper:
1) constructs a new measure of price markup
2) estimates the unconditional cyclicality of markups
3) analyzes the cyclicality of markups conditional on supply and demand shocks

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Model and price markup defs are standard.
Use of labor margin bc:
1) 0 or small adjustment costs on worker hours
2) labor inputs and wages paid are well-measured
3) lots of estimates on elasticities of substitution bween labor and capital
4) answer to critiques in paper
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Baseline measure based on Cobb-Douglas production fcn, labor share as total labor compensation divided by output, focusing on private business sector.

Estimates of price-cost margins and detrended price markups in graphs.

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First generalization of markup was to include overhead labor—> no attempt found to measure it. They estimate overhead labor in auto plants: ~11% of employment.

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Second generalization is moving from Cobb-Douglas to CES.

How to measure capital utilization? Three different versions:
1) constant utilization (at odds with standard NK)
2) Shapiro’s workweek of capital
3) Fernald’s utilization of capital and labor

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All different markup measures for CES

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Cobb-Douglas estimates and CES estimates.
The latter are all over: some measures tell us about procyclicality, some about countercyclicality.

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Now to the model!

We now look at the response of markup measures to 4 types of shocks:
1) monetary policy
2) government spending
3) TFP
4) investment-specific technology

Results in graphs below.

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Summary: Markup increases in response to the first 3 shocks, decreases to IST shocks. Results for 2 tech shocks consistent with NK models, but the results for demand shocks are not.

“Unconditional cyclicalities are not dispositive”

Linda Tesar from @UMich discusses

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