ARTICLE
ABSTRACT
In this study a regime-dependent ARDL model is developed in order to investigate how labour costs feed through into prices conditional on the business cycle position. Its estimates enable inference on the cyclical behaviour of markups. The proposed methodology is applied to the Polish industrial sectors. The obtained estimates point to procyclicality as the prevailing pattern of markup adjustment. Thus, overall markups in the Polish industry seem to have a mitigating effect on business cycle fluctuations. The degree of procyclicality seems, however, to be positively correlated with the degree of the industry’s competitiveness.
KEYWORDS
non-linear cointegration, regime-dependence, cost pass-through, markup cyclicality
JEL
C22, E31, E32
REFERENCES
Atkeson, A., Burstein, A. (2008). Pricing-to-Market, Trade Costs, and International Relative Prices. American Economic Review, 98(5), 1998–2031. https://doi.org/10.1257/aer.98.5.1998
Bils, M. (1987). The Cyclical Behavior of Marginal Cost and Price. American Economic Review, 77(5), 838–855.
Bils, M. (1989). Pricing in a Customer Market. Quarterly Journal of Economics, 104(4), 699–718. https://doi.org/10.2307/2937863
Bils, M., Kahn, J. A. (2000). What Inventory Behavior Tells Us About Business Cycles. American Economic Review, 90(3), 458–481. https://doi.org/10.1257/aer.90.3.458
Chevalier, J. A., Sharfstein, D. S. (1996). Capital-Market Imperfections and Countercyclical Markups: Theory and Evidence. American Economic Review, 86(4), 703–725. https://scholar .harvard.edu/files/davidscharfstein/files/capital_market_imperfections_and_countercyclical _markups.pdf
Chirinko, R. S., Fazzari, S. M. (1994). Economic Fluctuations, Market Power, and Returns to Scale, Evidence from Firm-Level Data. Journal of Applied Econometrics, 9(1), 47–69. https://doi.org /10.1002/jae.3950090105
Clementi, G. L., Palazzo, B. (2016). Entry, Exit, Firm Dynamics, and Aggregate Fluctuations. American Economic Journal: Macroeconomics, 8(3), 1–41. https://doi.org/10.1257/mac.20150017
Davies, R. B. (1977). Hypothesis testing when a nuisance parameter is present only under the alternative. Biometrika, 64(2), 247–254. https://doi.org/10.1093/biomet/64.2.247
Domowitz, I., Hubbard, R. G., Petersen, B. C. (1986). Business cycles and the relationship between concentration and price-cost margins. The RAND Journal of Economics, 17(1), 1–17. https://doi.org /10.2307/2555624
Domowitz, I., Hubbard, R. G., Petersen, B. C. (1988). Market Structure and Cyclical Fluctuations in U.S. Manufacturing. The Review of Economics and Statistics, 70(1), 55–66. https://doi.org /10.2307/1928150
Gali, J. (2013). Notes for a new guide to Keynes (I): wages, aggregate demand, and employment. Journal of the European Economic Association, 11(5), 973–1003. https://doi.org/10.1111/jeea.12032
Galí, J., Gertler, M., López-Salido, J. D. (2007). Markups, Gaps, and the Welfare Costs of Business Fluctuations. Review of Economics and Statistics, 89(1), 44–59. https://doi.org/10.1162/rest.89.1.44
Galí, J., Monacelli, T. (2016). Understanding the Gains from Wage Flexibility: The Exchange Rate Connection. American Economic Review, 106(12), 3829–3868. https://doi.org/10.1257/aer.20131658
Genesove, D., Mullin, W. P. (1998). Testing static oligopoly models: conduct and cost in the sugar industry. 1890–1914. Rand Journal of Economics, 29(2), 355–377. https://doi.org/10.2307/2555893
Gilchrist, S., Schoenle, R., Sim, J., Zakrajšek, E. (2017). Inflation Dynamics during the Financial Crisis. American Economic Review, 107(3), 785–823. https://doi.org/10.1257/aer.20150248
Goldberg, P. K., Hellerstein, R. (2013). A Structural Approach to Identifying the Sources of Local Currency Price Stability. The Review of Economic Studies, 80(1), 175–210.
Gopinath, G., Itskhoki, O., Rigobon, R. (2010). Currency Choice and Exchange Rate Pass- Through. American Economic Review, 100(1), 304–336. https://doi.org/10.1257/aer.100.1.304
Gottfries, N. (1991). Customer Markets, Credit Market Imperfections and Real Price Rigidity. Economica, 58(231), 317–323. https://doi.org/10.2307/2554819
Green, E. J., Porter, E. H. (1984). Noncooperative Collusion under Imperfect Price Competition. Econometrica, 52(1), 87–100. https://doi.org/10.2307/1911462
Greenwald, B., Stiglitz, J. E., Weiss, A. (1984). Information Imperfections in the Capital Market and Macroeconomic Fluctuations. American Economic Review, 74(2), 194–199.
Hall, R. E. (1986). Market Structure and Macroeconomic Fluctuations. Brookings Papers on Economic Activity, (2), 285–322. https://doi.org/10.2307/2534476
Hall, R. E. (1988). The Relation between Price and Marginal Cost in U.S. Industry. Journal of Political Economy, 96(5), 921–947. https://doi.org/10.1086/261570
Hall, R. E. (2012). The Cyclical Response of Advertising Refutes Counter-Cyclical Profit Margins in Favor of Product Market Frictions (NBER Working Paper No. 18370). https://doi.org/10.3386 /w18370
Hansen, B. E. (1996). Inference When a Nuisance Parameter Is Not Identified Under the Null Hypothesis. Econometrica, 64(2), 413–430. https://doi.org/10.2307/2171789
Hansen, B. E. (2000). Sample Splitting and Threshold Estimation. Econometrica, 68(3), 575–603. https://doi.org/10.1111/1468-0262.00124
Hellerstein, R. (2008). Who bears the cost of a change in the exchange rate? Pass-through accounting for the case of beer. Journal of International Economics, 76(1), 14–32. https://doi.org/10.1016 /j.jinteco.2008.03.007
Klemperer, P. (1995). Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade. The Review of Economic Studies, 62(4), 515–539. https://doi.org/10.2307/2298075
Lee, Y., Mukoyama, T. (2015). Entry and Exit of Manufacturing Plants over the Business Cycle. European Economic Review, 77, 20–27. https://doi.org/10.1016/j.euroecorev.2015.03.011
Martins, J. O., Scarpetta, S. (2002). Estimation of the Cyclical Behaviour of Mark-ups: A Technical Note. OECD Economic Studies, 34(1), 173–188. https://dx.doi.org/10.2139/ssrn.335543
Nakamura, E. (2008). Pass-Through in Retail and Wholesale. American Economic Review, 98(2), 430–437. https://doi.org/10.1257/aer.98.2.430
Nakamura, E., Zerom, D. (2010). Accounting for Incomplete Pass-Through. The Review of Economic Studies, 77(3), 1192–1230. https://doi.org/10.1111/j.1467-937X.2009.589.x
Nekarda, Ch. J., Ramey, V. A. (2013). The Cyclical Behavior of the Price-Cost Markup (NBER Working Paper No. 19099). https://doi.org/10.3386/w19099
Okun, A. M. (1981). Price and Quantities: A Macroeconomic Analysis. Oxford: Basil Blakwell.
Pesaran, M. H., Shin, Y. (1999). An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis. In S. Strom (Ed.), Econometrics and Economic Theory in the 20th Century:
The Ragnar Frisch Centennial Symposium (pp. 371–413). Cambridge: Cambridge University Press. https://doi.org/10.1017/CCOL521633230.011
Pesaran, M. H., Shin, Y., Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. https://doi.org/10.1002/jae.616
Phelps, E. S., Winter, S. G. (1970). Optimal Price Policy under Atomistic Competition. In E. S. Phelps (Ed.), Microeconomic Foundations of Employment and Inflation Theory (pp. 309– 337). New York: Norton.
Roeger, W. (1995). Can Imperfect Competition Explain the difference between Primal and Dual Productivity Measures? Estimates for U.S. Manufacturing. Journal of Political Economy, 103(2), 316–330. https://doi.org/10.1086/261985
Rotemberg, J. J., Saloner, G. (1986). A Supergame-Theoretic Model of Price Wars during Booms. American Economic Review, 76(3), 390–407. http://citeseerx.ist.psu.edu/viewdoc/download ;jsessionid=1DEC95EC5284A7DA2BE74B15ADF2F49D?doi=10.1.1.676.1323&rep=rep1&type=pdf
Rotemberg, J. J., Woodford, M. (1991). Markups and the Business Cycle. In O. J. Blanchard, S. Fisher (Eds.), NBER Macroeconomics Annual 1991, Volume 6, (pp. 63–129). Cambridge, MA: MIT Press. https://doi.org/10.1086/654159
Rotemberg, J. J., Woodford, M. (1992). Oligopolistic Pricing and Effects of Aggregate Demand on Economic Activity. Journal of Political Economy, 100(6), 1153–1205. https://doi.org/10.1086 /261857
Rotemberg, J. J., Woodford, M. (1999). The Cyclical Behavior of Prices and Costs. In J. B. Taylor, M. Woodford (Eds.), Handbook of Macroeconomics, Volume 1B (pp. 1051–1135). Amsterdam: Elsevier B.V. https://doi.org/10.1016/S1574-0048(99)10024-7
Shin, Y., Yu, B., Greenwood-Nimmo, M. (2014). Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework. In W. C. Horrace, R. C. Sickles (Eds.), Festschrift in Honor of Peter Schmidt: Econometric Methods and Applications (pp. 281–314). New York: Springer. https://dx.doi.org/10.2139/ssrn.1807745
Stiglitz, J. E. (1984). Price Rigidities and Market Structure. American Economic Review, 74(2), 350– 355. https://doi.org/10.7916/D8FN1H7B
Tian, C. (2018). Firm-level entry and exit dynamics over the business cycles. European Economic Review, 102, 298–326. https://doi.org/10.1016/j.euroecorev.2017.12.011
Weyl, E. G., Fabinger, M. (2013). Pass-Through as an Economic Tool: Principle of Incidence under Imperfect Competition. Journal of Political Economy, 121(3), 528–583. https://doi.org/10.1086 /670401
