Directed Search, Nominal Rigidities and Markup Cyclicality

Research output: Conference PapersRGC 32 - Refereed conference paper (without host publication)peer-review

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Original languageEnglish
Publication statusPublished - Jun 2019

Conference

Title2019 North American Summer Meeting of the Econometric Society (NASMES 2019)
LocationUniversity of Washington
PlaceUnited States
CitySeattle
Period27 - 30 June 2019

Abstract

New Keynesian models with sticky prices built on the Dixit-Stiglitz framework must have countercyclical mark-ups conditional on monetary shocks, which is inconsistent with empirical evidence based on labor share data. We pose a directed search style shopping friction in goods market to model firms' price setting, on top of Dixit-Stiglitz. Our theory allows for procyclical mark-ups conditional on monetary shocks, without sacrificing the performance of the model along other dimensions. We prove this in a static model, and test it in an estimated medium scale DSGE model. Unlike the literature that criticizes the use of labor share, we provide a complementary view that New Keynesian models can actually be compatible with procyclical mark-ups conditional on monetary shocks, if there is goods market shopping friction.

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Citation Format(s)

Directed Search, Nominal Rigidities and Markup Cyclicality. / Qiu, Zhesheng; Rios-Rull, Jose-Victor.
2019. Paper presented at 2019 North American Summer Meeting of the Econometric Society (NASMES 2019), Seattle, Washington, United States.

Research output: Conference PapersRGC 32 - Refereed conference paper (without host publication)peer-review