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Markup polarization and efficacy of monetary policy: A tale of two firms

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  • Ko, Eunmi

Abstract

It is well established that price–cost markups have risen over time, particularly among high-markup firms, leading to greater dispersion in markups. Empirical studies suggest that this widening distribution reflects underlying shifts in consumer preferences. To explore the implications of markup polarization for inflation dynamics, I extend a basic New Keynesian model to include two types of firms: high-markup firms (branded products) and low-markup firms (mass-market products). In this extended framework, the New Keynesian Phillips Curve (NKPC) exhibits more muted inflation dynamics. Numerical analysis demonstrates that markup polarization significantly dampens the aggregate inflation response to an expansionary monetary policy shock, while modestly amplifying the aggregate output response compared to the conventional model. This asymmetry arises because high-markup firms primarily adjust prices, whereas low-markup firms primarily adjust output. I also evaluate welfare losses associated with the observed increase in markup dispersion between 1980 and 2016.

Suggested Citation

  • Ko, Eunmi, 2025. "Markup polarization and efficacy of monetary policy: A tale of two firms," Economic Modelling, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:ecmode:v:151:y:2025:i:c:s0264999325001828
    DOI: 10.1016/j.econmod.2025.107187
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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