This study takes the premise that imperfectly competitive product markets and variations in the degree of market power possessed by firms play important roles in how a variety of aggregate shocks affect employment and economic activity. This study intends to examine various models of imperfect competition in which the equilibrium markup changes in response to aggregate shocks. Particular attention will be given to developing a theoretically rigorous and empirically tested quantitative model of the effects on U.S. output and employment of energy price changes. The empirical success of the various theories will be tested in two ways. First, the effects of certain shocks (such as changes in world oil prices) upon the U.S. economy will be estimated using a relatively atheoretical econometric specification. These estimated impulse responses will then be compared to the quantitative predictions of "calibrated" versions of the theoretical models. Second, certain structural equations of the models (especially those linking average mark-ups to other macroeconomic variables) will be estimated econometrically, and the coefficient restrictions implied by the various theories formally will be tested. This project is meritorious because it deals with substantive economic matters - the influence of market structure on aggregate fluctuations. It will also serve to close current methodological gaps between alternative schools of macroeconomic thought. Finally, the study of the consequences of oil price shocks is in itself a very important and noteworthy activity.
