Demand, Markups and the Business Cycle

We generalize the demand side of a Real Business Cycle model introducing non-homothetic intratemporal preference aggregators over differentiated final goods. Under monopolistic competition this generates markups which vary with aggregate consumption. We estimate a flexible preference specification through Bayesian methods and obtain results consistent with substitutability across goods that is increasing in consumption. The associated markup variability magnifies the propagation of shocks through additional substitution effects on labor supply and consumption.