November 22, 2021

Central Bank Research Hub

Macroeconomic Changes with Declining Trend Inflation: Complementarity with the Superstar Firm Hypothesis

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Originally published on by Bank of International Settlements . Link to original report

Recent studies indicate that, since 1980, the US economy has undergone increases in the average markup and the profit share of income and decreases in the labor share and the investment share of spending. We examine the role of monetary policy in these changes as inflation has concurrently trended down. In a simple staggered price model with a non-CES aggregator of individual differentiated goods, a decline of trend inflation as measured since 1980 can account for a substantial portion of the changes. Moreover, adding a rise of highly productive "superstar firms" to the model can better explain not only the macroeconomic changes but also the micro evidence on the distribution of firms' markups, including the flat median markup.

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Bank of Japan Working Papers by Takushi Kurozumi and Willem Van Zandweghe

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