Markups and Oil Prices in Canada
The markup (the ratio of price to marginal cost) in Canada has risen steadily since the early 1990s suggesting a widening gap between the actual and the efficient level of output and a declining share of labour income in GDP. It exhibits non-stationary movements over the sample period 1982Q1 to 2009Q4, allowing us to identify a permanent markup shock. We provide evidence that oil price movements are important for understanding the behaviour of the markup, and separately identify both oil price shocks and permanent non-oil markup shocks. Our key findings are: (1) oil price shocks and non-oil markup shocks account for 50 to 80 percent of the variation in the markup, with the former dominating at shorter horizons; (2) the role of oil price shocks is prominent in accounting for the upward trend in the markup since the mid-1990s; (3) the direct effects of oil prices on the markup in the mining sector (which includes the oil-producing sector) have contributed the most to the upward trend in the aggregate markup; and (4) other explanations such as market structure shifts, trend inflation movements and the falling relative price of investment do not appear to account for the behaviour of the markup.
|Keywords||Permanent markup shocks, Oil prices, Market structure, Declining labour income share|
|JEL||Price Level; Inflation; Deflation (jel E31), Business Fluctuations; Cycles (jel E32)|
|Publisher||Department of Economics|
|Series||Carleton Economic Papers (CEP)|
Khan, H.U, & Kim, Bae-Geun. (2012). Markups and Oil Prices in Canada (No. CEP 11-06). Carleton Economic Papers (CEP). Department of Economics.