Do Supply Curves Slope Up?

Abstract

This paper examines the short-run responses of price and quantity to exogenous demand shocks for disaggregated U. S. manufacturing industries, using prior information on input-output linkages to identify industries whose fluctuations are likely to function as approximately exogenous demand shocks for other industries. I find that demand shocks induce positive covariation between price and quantity for 16 out of 26 sample industries, controlling for observable cost shift variables. When sample industries are pooled, I estimate that a demand shock which initially raises industry output by 1 percent generates a price increase of 0.182 percent within one year. I find that input-output instruments detect upward sloping supply curves more readily than least squares or other commonly used demand-shift instruments.

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