Markup Variation and Endogenous Fluctuations in the Price of Investment Goods

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 di erently 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.

Keywords: price of investment, business cycle, dynamics, markup

Authors: Max Floetottoy, Nir Jaimovichz, Seth Pruittx

9 Floetotto, Jaimovich & Seth 2009.pdf