Shock to the relation between marginal revenue and marginal cost

Hi all I have a question regarding shocks. how can one interpret a shock to the first order condition of firm in a rbc framework?
For example, marginal revenue = marginal cost + shock.

Isn’t this a simple cost push shock?

you are right in New keynesian models. But I fail to mention the details. is it possible to have a cost push shock in rbc model? say for tradable goods, where marginal revenue is foriegn prices?

Hi econ26,

Yes, it is possible.
Start from the pricing rule
or simply
by the symmetry due to flexible prices in RBC.

If you define the mark-up \mu=\frac{\epsilon}{\epsilon-1}, you can think of the mark-up as time-varying, i.e. \mu_{t}, due to changes in the substitutability among good varieties, and specify a process for it.
A standard formulation would be to have the current mark-up fluctuate around its steady-state level \bar\mu with persistence (1-\rho) and around its lag with persistence \rho, inclusive of a random innovation.:slightly_smiling_face:

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@cmarch That is a different, but valid interpretation in this setup

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