A reinvestigation of the markup and the business cycle

A fresh interpretation is provided of the influential finding that the markup of prices over marginal costs is counter-cyclical. Using quarterly US data we argue that the markup is best modelled as a variable that is integrated of order one. A consequence of this finding is that the markup cannot be related in the long run with business cycle variables since these are traditionally thought of as being stationary. A distinction must therefore be made between the long- and the short-run behaviour of the markup. It is shown that the markup is negatively related to inflation in the long-run, while stationary transforms of the markup are counter-cyclical in the short-run. (C) 2003 Elsevier Science B.V. All rights reserved.