Working Papers

September 1995, No. 95-4

Customer Flows, Countercyclical Markups, and the Persistent Effects of Monetary Shocks

Peter N. Ireland

This paper develops a general equilibrium model in which households face fixed costs associated with searching for a new supplier of consumption goods. These search costs provide firms with some monopoly power over their existing customers and generate the kind of customer flow dynamics first considered by Phelps and Winter. Customer flows, in turn, cause markups of price over marginal cost to vary countercyclically, both amplify and propagate the effects of technology shocks on output, and allow the effects of monetary shocks on output to persist.

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