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Wesselbaum, D. Price Bargaining and the Business Cycle. Applied Economics Quarterly, 66(1), 1-27.
Wesselbaum, Dennis "Price Bargaining and the Business Cycle" Applied Economics Quarterly 66.1, , 1-27.
Wesselbaum, Dennis: Price Bargaining and the Business Cycle, in: Applied Economics Quarterly, vol. 66, iss. 1, 1-27, [online]


Price Bargaining and the Business Cycle

Wesselbaum, Dennis

Applied Economics Quarterly, Vol. 66 (2020), Iss. 1 : pp. 1–27

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Dennis Wesselbaum, Department of Economics, University of Otago, Dunedin 9016, New Zealand.


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This paper models a segmented production sector with price bargaining between the intermediate good firm and the final good firm. We show how to incorporate price bargaining in an otherwise standard New Keynesian model and discuss its macroeconomic implications. Estimating the model on U.S. data using Bayesian methods, we find that the intermediate good firm has 50 percent of the bargaining power. We find that the size of the bargaining power determines the quantitative and qualitative macroeconomic effects.

Further, we quantify the size of switching costs: they are equal to about two percent of output. Shocks to switching costs are specific to this model and generate sizable macroeconomic fluctuations.

Table of Contents

Section Title Page Action Price
Dennis Wesselbaum: Price Bargaining and the Business Cycle 1
Abstract 1
1. Introduction 1
2. Model Derivation 4
2.1 Consumption 4
2.2 Production 6
2.3 Price Bargaining 8
2.4 Equilibrium and Calibration 1
3. Estimation 1
3.1 Methodology, Data, and Priors 1
3.2 Posterior Estimates 1
3.3 Impulse Response Functions 1
4. Inspecting the Mechanism 1
4.1 Technology Shocks 1
4.2 Switching Cost Shock 2
5. Conclusion 2
References 2
Appendix 2