Identifying a Permanent Markup Shock, and Its Implications for Macroeconomic Dynamics

Identifying a Permanent Markup Shock, and Its Implications for Macroeconomic Dynamics

A permanent markup shock is justi…ed using an industry-based model in which an increase in the market concentration raises the desired markup. In order to identify the markup shock with structural vector autoregressions, a new identi…- cation scheme is developed. Combined with standard long-run restrictions that can identify shocks to technology and aggregate demand, this paper shows that (1) in‡ation responds immediately to shocks to the markup and technology whereas it displays a hump-shaped response to a demand shock with no price puzzle, and that (2) per capita hours decline permanently in response to the markup shock whereas a technology shock lowers per capita hours only in the short-run. These empirical …ndings imply that in‡ation itself does not exhibit intrinsic inertia. Moreover, the results have important implications for the technology-hours debate, suggest- ing that the e¤ects of a technology shock may not be identi…ed correctly without consideration of the permanent markup shock.