Santos, Carlos D.Costa, Luis F.Brito, Paulo2024-03-272024-03-272016Santos, Carlos D., Luís F. Costa and Paulo Brito .(2016). "Demand, supply and markup fluctuations". Nova SBE - Working Papers No 609/ 2016. (Search PDF in 2024).http://hdl.handle.net/10400.5/30487The cyclical behavior of markups is at the center of macroeconomic debate on the origins of business-cycle fluctuations and policy effectiveness. In theory, markups may fluctuate endogenously with the business cycle due to sluggish price adjustment or to deeper motives affecting the price-elasticity of demand faced by individual producers. In this article we make use of a large Örm- and product-level panel of Portuguese manufacturing Örms in the 2004-2010 period. The biggest empirical challenge is to separate supply (TFP) from demand shocks. Our dataset allows to do so, by containing information on product-level prices at a yearly frequency. Furthermore, markups are mismeasured when calculated with the labor share. We use the share of intermediate inputs instead. Our main results suggest that markups are pro-cyclical with TFP shocks and generally counter-cyclical with demand shocks. We also show how markups become procyclical if the markup is obtained using the labour share instead of intermediate inputs. Adjustment costs create a wedge between the labour share and the actual markup which explain the observed correlations.engMarkupsDemand ShocksTFP Shocksworking paper