The seminar will be held in the Visitor Centre at 1:30 pm.
Abstract
The counter-cyclicality in the relative price of equipment investment which is observed in the U.S. has been attributed to equipment-specific productivity shocks. Cross-country evidence indicates that a number of countries experience sizeable delays between a surge in equipment production and a fall in its relative price, which is di_cult to reconcile with sector specific shocks. I show that in the presence of sector specific, time-varying markups, relative price movements arise as a direct consequence of consumption smoothing, even if all shocks are aggregate, while barriers to firm entry lead to delays in relative price responses. A calibrated version of the model explains around one-third of the relative price uctuations which are observed in the U.S., as well as the qualitative differences in the behaviourof this relative price across countries.
JEL Codes: E25, E32, D43
Keywords: endogenous markups; _rm entry and exit; relative prices