Markups, inflation, and monetary policy transmission
In this paper, van der Ploeg and Willems develop a model to analyze inflation dynamics resulting from a “distributional conflict” between workers and firms over markups. Both groups aspire to achieve certain “frictionless” markups (abstracting from nominal rigidities), but their competing claims may be mutually inconsistent. The model features procyclical wage markups but allows for different assumptions about price markup cyclicality. The authors introduce an “aspirational channel” whereby monetary policy affects inflation by influencing the state of the economy and thereby the markup aspirations:
- If price markups are procyclical, contractionary monetary policy successfully reduces inflation by lowering markup aspirations of workers and/or firms by getting them to settle for a lower markup.
- If price markups are countercyclical, tightening can be destabilizing as the ensuing recession then leads firms to increase markups, giving rise to renewed inflationary pressures.
- The slope of the Phillips curve also matters – a flatter curve calls for a more “dovish” policy (less sensitivity to inflation, more to output gaps) to ensure determinacy.
Estimating price markup cyclicality across 43 countries, the authors find that contractionary monetary shocks indeed have stronger anti-inflationary effects in countries with greater markup procyclicality. In summary, the distributional battle over markups can determine inflation dynamics and monetary transmission. Policymakers should account for the cyclicality of price markups in particular when setting interest rates.
Battle of the markups: conflict inflation and the aspirational channel of monetary policy transmission
Authors: Frederick van der Ploeg, Tim Willems
From: University of Oxford, Bank of England
Markups, inflation, and supply chain disruptions
In this paper, Franzoni et al. study how supply chain disruptions affect firms and inflation. The authors construct measures of supply chain backlogs and delivery delays using survey data on purchasing managers. Their sample covers 18,969 firms in 83 countries across 62 2-digit SIC industries.
- The main finding is that when supply chains experience disruptions, large “superstar” firms gain market share and increase their profit margins compared to smaller firms in the industry. This occurs because superstars have more bargaining power over their suppliers and are better able to withstand the disruptions.
- The authors then show that industries with more superstar firms and asymmetric firm size distribution experienced higher inflation following supply chain disruptions during COVID-19. This “greedflation” channel can explain about 19% of US pandemic inflation.
To the extent that monetary policy contractions lead to a decrease in sales by small firms […], financial frictions may further reduce competition. In this light, the channel that we highlight can trigger inflation that persists even after the supply chain shortages have subsided.
Supply Chain Shortages, Large Firms’ Market Power, and Inflation
Authors: Francesco A. Franzoni, Mariassunta Giannetti, Roberto Tubaldi
From: Universita della Svizzera Italiana, Stockholm School of Economics, BI Norwegian Business School
