Markups and Fiscal Policy : Analytical Framework and an Empirical Investigation

The paper focuses on the effects of fiscal policy on the industry-specific profit margin of a sector of an economy. This is a deviation from the existing literature, which focuses mainly on the effects of fiscal policy on the profit margin of the economy as a whole. In this work the price cost margin at the industry level is expressed as a function of the fiscal balance and other market variables such as industry share and price which are usually absent in a macro-analysis environment. Using a panel of ten European Union member countries for the period 1988-2005 we obtain the statistical results that support the existence of a non trivial relationship between price cost margin and fiscal policy, as it is expressed by the fiscal balance of a country. There are differences, however, between countries as well as industries reflecting different production and labor market conditions