Market power and business cycles in Portugal in the 21st century

Abstract

This dissertation investigates the cyclical behaviour of the branches and aggregate markups in the Portuguese economy from 1995 to 2021, with a focus on decomposing changes in aggregate markups into their primary components: markup changes, branches weight changes, and their interaction. Additionally, the study gives an insight on the impact of major economic events such as the 2008-2009 financial crisis and the 2011- 2014 European sovereign debt crisis on markups in Portugal. The decomposition reveals that both labour- and materials-based markups exhibited an unconditional counter-cyclical behaviour, with notable fluctuations during periods of economic crises and recovery. Markup changes were primarily driven by structural change, i.e. due to sectorial weight shifts. The interaction effect between markups and weights became significant during periods of economic turbulence, especially during the Troika intervention and austerity measures, reflecting the complex dynamics of sectorial adjustments. The results suggest that sectorial shifts and the relative importance of key industries were critical in shaping the evolution of aggregate markups. The recovery phase post-2014 saw a gradual stabilization, with positive contributions from weight changes as key industries regained prominence. This study’s contribution lies in its detailed decomposition of markup behaviour and its application to the Portuguese economy, providing insights into how external shocks and sectorial adjustments influence aggregate trends. Future research could further explore the implications of sectorial dynamics on broader economic policy and international comparisons.