The Effects of Permanent Markup Shocks in Canada – revised version: Markups and Oil Prices in Canada (12 October 2012)

The markup in Canada has exhibited non-stationary movements, rising steadily since the early 1990s. This implies the presence of a permanent markup shock which causes the desired markup ratio to shift permanently. It is shown that after a permanent positive markup shock, output, per-capita hours, and the real wage decline both in the short and the long run. The effect on inflation dissipates quickly whereas the effect on wage inflation is relatively persistent. Increases in oil prices seem to substantially affect the observed markup and account for a relatively large component of the identified permanent markup variation. Changes in market structure and trend inflation, however, do not appear to account for the upward trend in the markup.