Markups and fiscal transmission in a panel of OECD countries

Abstract

This paper studies the role of the markup of price over marginal cost for the transmission of fiscal policy shocks. We construct time series of markups allowing for fluctuations in capacity utilization and total factor productivity and use an aggregate production function that is more general than Cobb-Douglas. Including the constructed markup series in a panel vector autoregression with annual OECD data, we find that a positive shock to government spending substantially lowers markups while raising output, consumption, real interest rates, and government debt. The positive output response appears to result mainly from the positive reaction of capital utilization rather than from the one of hours worked. JEL classification: E62, E32, C33