Working Paper

Customer Capital, Markup Cyclicality, and Amplification

Abstract: This paper studies the importance of firm-level price markup dynamics for business cycle fluctuations. Using state-of-the-art IO techniques to measure the behavior of markups over the business cycle at the firm level, I find that markups are countercyclical with an average elasticity of -1.1 with respect to real GDP. Importantly, I find substantial heterogeneity in markup cyclicality across firms, with small firms having significantly more counter-cyclical markups than large firms. Then, I develop a general equilibrium model by embedding customer capital (due to deep habits as in Ravn, Schmitt-Grohe, and Uribe, 2006) into a standard Hopenhayn (1992) model of firm dynamics with entry and exit. The calibrated model replicates these empirical facts and produces counter-cyclical firm sales dispersions consistent with the data. The resulting input misallocation amplifies both the volatility and persistence of the aggregate productivity shocks driving the business cycle.

Keywords: Business Cycle; Customer Capital; Entry and Exit; Markup Cyclicality;

JEL Classification: E31; E32; L11; L13;

https://doi.org/10.20955/wp.2017.033

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2019-02-25

Number: 2017-33

Pages: 61 pages