Hi Professor,
I am going through the micro-foundations of the SW model. Regarding the setup of Final Good producers, I am a bit confused over the following texts from the model appendix online:
The final good Yt is a composite made of a continuum of intermediate goods Yt(i) as in
Kimball (1995). The final good producers buy intermediate goods on the market, pack-
age Yt, and resell it to consumers, investors, and the government in a perfectly competitive
market.
Then it says there is a price mark-up shock which is an exogenous process that reflects shocks to the aggregator function that results in changes in the elasticity of demand and therefore in the markup.
(please find attached the screenshot)
I am wondering if final goods producers operate in a perfectly competitive environment, wouldn’t their markup be fixed at 1, and where does this mark-up shock come from?
