Relative Price Fluctuations in a Multi-Sector Model with Imperfect Competition

Counter-cyclical fluctuations in the price of investment in consumption units are often attributed to investment-specific technology shocks. This paper looks at an additional source for such fluctuations: sector-specific markup variations, the idea being that pro-cyclical competition and the higher variability of investment compared to consumption pushes down the relative price of investment during expansions. I find that such endogenous movements in sector-specific markups can account for up to 30% of the observed fluctuations in the price of investment. (Copyright: Elsevier)