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Closed and open economy models of business cycles with marked up and sticky prices

Barro, Robert J. and Tenreyro, Silvana (2000) Closed and open economy models of business cycles with marked up and sticky prices. . National Bureau of Economic Research, Cambridge, MA., USA.

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Shifts in the extent of competition, which affect markup ratios, are possible sources of aggregate business fluctuations. Markups are countercyclical, and booms are times at which the economy operates more efficiently. We begin with a real model in which markup ratios correspond to the prices of differentiated intermediate inputs relative to the price of undifferentiated fmal product. If the nominal prices of the differentiated goods are relatively sticky, then unexpected inflation reduces the relative price of intermediates and thereby mimics the output effects from an increase in competition. In an open economy, domestic output is stimulated by reductions in the relative price of foreign intermediates and, therefore, by unexpected inflation abroad. The various versions ofthe model imply that the relative prices of less competitive goods move countercyclically. We find support for this hypothesis from price data of four-digit manufacturing industries.

Item Type: Monograph (Working Paper)
Official URL:
Additional Information: © 2000 Robert J. Barro and Silvana Tenreyro
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HB Economic Theory
Date Deposited: 03 Jun 2008 16:56
Last Modified: 06 Dec 2020 00:32

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