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

November 22, 2021
Takushi Kurozumi*1
Willem Van Zandweghe*2

Abstract

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.

JEL classification
E52, L16

Keywords
Average markup; Profit share; Labor share; Trend inflation; Non-CES aggregator; Superstar firm hypothesis

The authors are grateful to David Berger, Florin Bilbiie, Munechika Katayama, Koji Nakamura, Brent Neiman, Makoto Nirei, Vincenzo Quadrini, Richard Rogerson, Nao Sudo, and seminar participants at the Federal Reserve Bank of Cleveland and Waseda University for comments and discussions. The authors also thank Todd Clark and Raphael Schoenle for sharing the data on the trend inflation rate and the frequency of price adjustment, respectively, with us. Kristen Tauber provided excellent research assistance. The views expressed in the paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan, the Federal Reserve Bank of Cleveland, or the Federal Reserve System.

  1. *1Monetary Affairs Department, Bank of Japan
    E-mail : takushi.kurozumi@boj.or.jp
  2. *2Research Department, Federal Reserve Bank of Cleveland
    E-mail : willem.vanzandweghe@clev.frb.org

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