Demand, supply and markup fluctuations.- Carlos Santos, Luís F. Costa, Paulo Brito

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  • Last update: 17 October 2016
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  • Author: Carlos Santos, Luís F. Costa, Paulo Brito


The cyclical behavior of markups is at the center of macroeconomic debate on the origins of business-cycle fl‡uctuations and policy e¤ectiveness. In theory, markups may fl‡uctuate endogenously with the business cycle due to sluggish price adjustment or to deeper motives affecting the price-elasticity of demand faced by individual producers. In this article we make use of a large …firm- and product-level panel of Portuguese manufacturing fi…rms in the 2004-2010 period. The biggest empirical challenge is to separate supply (TFP) from demand shocks. Our dataset allows to do so, by containing information on product-level prices at a yearly frequency. Furthermore, markups are mismeasured when calculated with the labor share. We use the share of intermediate inputs instead. Our main results suggest that markups are pro-cyclical with TFP shocks and generally counter-cyclical with demand shocks. We also show how markups become procyclical if the markup is obtained using the labour share instead of intermediate inputs. Adjustment costs create a wedge between the labour share and the actual markup which explain the observed correlations.

Keywords: Markups, Demand shocks, TFP shocks