Markups’ cyclical behaviour: the role of demand and supply shocks

abstract

We assess how demand and supply shocks (identified via the Blanchard and Quah (1989) structural vector autoregression approach) in 14 OECD countries affect markups. We find that individual responses of markups to demand shocks push down the markup for most countries (confirmed in the panel analysis). On the other hand, a supply shock has a more mixed effect.

Keywords:

• Blanchard–Quah
• markup
• VAR
• impulse response function
• local projection

JEL Classification:

• C23
• E32
• E62

Notes

¹ Here y and u are assumed to be I(1) and hence the VAR model uses first differences of the respective variables.

² While the presence of a lagged dependent variable and country-fixed effects may in principle bias the estimation of and in small samples (Nickell 1981), the length of the time dimension mitigates this concern. The finite sample bias is in order of 1/T, where T in our sample is 38.

³ These include accounting for potential endogeneity by re-estimating the IRFs using GMM estimators. Moreover, Equation 8 was re-estimated by including time-fixed effects to control for specific time shocks. The results (omitted) for this specification remain statistically significant and broadly unchanged. Furthermore, a possible bias from estimating Equation 8 using country-fixed effects is that the error term of the equation may have a nonzero expected value, due to the interaction of fixed effects and country-specific arrival rates of shocks. This would lead to a bias in the estimates that is a function of k. To address this issue, Equation 8 was re-estimated by excluding country-fixed effects. The results (omitted) suggest that this bias is negligible.