Do markup dynamics reflect fundamentals or changes in conduct?

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Title: Do markup dynamics reflect fundamentals or changes in conduct?
ISBN: 978-952-462-506-7
Author: Juselius, Mikael ; Kim, Moshe ; Ringbom, Staffan
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2009
Series number: 12/2009
Year of publication: 2009
Publication date: 8.4.2009
Pages: 44 s.
Keywords: Ranska; Belgia; Saksa; Alankomaat; Espanja; pankkitoiminta; Eurooppa; USA; mittaus; kilpailu; hinnoittelu; mallit; menetelmät; VAR
JEL: C32; C51; G20; L13; L16
Abstract: Persistent shifts in equilibria are likely to arise in oligopolistic markets and may be detrimental to the measurement of conduct, related markups and intensity of competition. We develop a cointegrated VAR (vector autoregression) based approach to detect long-run changes in conduct when data are difference stationary. Importantly, we separate the components in markups which are exclusively related to long-run changes in conduct from those explained solely by fundamentals. Our approach does not require estimation of markups and conduct directly, thereby avoiding complex problems in existing methodologies related to multiple and changing equilibria. Results from applying the model to US and five major European banking sectors indicate substantially different behavior of conventional raw markups and conduct-induced markups. Keywords: markups, cointegration, VAR, macroeconomic fundamentals, competition, banking JEL classification numbers: C32, C51, G20, L13, L16

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