Cyclical Flucuation of Markups in Japanese Manufacuring Industries

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We explored broader issues concerning cyclical fluctuation of markups in Japanese manufacturing industries. Our major findings are summarized below.(1) We find that markups are generally pro-cyclical in Japanese manufacturing. This tendency is statistically significant and robust under alternative estimation procedures of makrups.(2) Markups are generally sesnsitive to changes in prices of competing imports. The average response elasticity of markups is around 2 among industries in which the estimated coefficients for the competing import prices are significant.(3) We estimated a model of inter-firm transactions with trade credits, incorporating the role of financial constraints on pricing and the effect of profit sharing between customer and supplier firms. We found that the firms reduce the shadow price of material and intermediate inputs when the firm is under financial constraint and use trade credit to finance the purchase. We also found that the correlations of markups are higher and more significant between industries with close inter-industry trades. This is found to be consistent with procyclical markup fluctuations.(4) Another important source of fluctuations in markups is price rigidity. We found strong and robust price rigidity. We also found that the rigidity is highly asymmetric : prices are far more rigid downward than upward. Although this tends to make markups less pro-cyclical, we found that the downward rigidity did not manifest itself strongly until recently mainly because of fairly steady and sizable inflation in Japan.