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Working Paper

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

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Recent studies indicate that, since 1980, the average markup and the profit share of income have increased, while the labor share and the investment share of spending have decreased. 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 differentiated goods, a decline in trend inflation as measured since 1980 can account for a substantial portion of the changes. Moreover, introducing a rise in the productivity of “superstar firms” in 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.
Topics
Economic growth
Inflation
Industrial organization
11.12.2020ISSN 2573-7953 WP 20-35DOI 10.26509/frbc-wp-202035
Keywords average markup, profit share, labor share, trend inflation, non-CES aggregator, superstar firm hypothesis
JEL Classification Codes E52, L16

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Kurozumi, Takushi, and Willem Van Zandweghe. 2020. “Macroeconomic Changes with Declining Trend Inflation: Complementarity with the Superstar Firm Hypothesis.” Federal Reserve Bank of Cleveland, Working Paper No. 20-35. https://doi.org/10.26509/frbc-wp-202035