Estimating the Price Markup in the New Keynesian Model

Martin Møller Andreasen, Mads Khoa-Dang Dang

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Abstract

This paper shows that the price demand elasticity can be estimated reliably in a standard log-linearized version of the New Keynesian model when including firm profit as an observable in the estimation. Using this identification strategy for the post-war US economy, we find an estimated price demand elasticity of 2.58 with a tight standard error of 0.31. This corresponds to an average price markup of 63% with a 95% confidence interval of [39%, 88%]. We also show that a calibrated markup of 20%, as commonly used in the literature, is rejected by the data, because it generates too much variability in firm profit.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages22
Publication statusPublished - 7 Mar 2019
SeriesCREATES Research Paper
Number2019-03

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