Sticky Prices, Markup and the Business Cycle: Some Evidence.

In this paper we provide empirical evidence of a positive correlation between the degree of competition and the persistence of the deviation of real output from trend. Under the assumption of imperfect competition and sticky prices we simulate a simple dynamic general equilibrium model to derive the theoretical correlation between competition and persistence. We then use a panel of 24 OECD countries to estimate the correlation between a measure of the markup and a measure of persistence. The markup is measured using the observed unit labour cost. On the basis of our theoretical results, we find it easier to believe that the observed unit labour cost does indeed reflect the size of the markup. Our result is consistent with existing microeconomic evidence on the relationship between competition and price rigidity.