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The Markup Elasticity of Monetary Non-Neutrality


E2022020                                                                     2022-11-10

Christian Höynck   Minghao Li   Donghai Zhang

Firms’ market power, measured by markups, has risen substantially and unequally across sectors. We develop a quantitative menu cost model that features multiple sectors with heterogeneous degrees of market competition to evaluate the implications of these trends for monetary non-neutrality. Two quantitative results stand out. First, the average markup elasticity of monetary non-neutrality in the United States equals 1. Second, the markup elasticity of monetary non-neutrality would be equal to 1.4 had the markup increased equally across sectors. We provide evidence to support the model mechanisms and predictions,and to differentiate the proposed mechanisms from the existing ones.

Keywords: Rising market power,  Monetary non-neutrality,  Menu cost model, Heterogeneous market power,  Multi-sector model
JEL Classification: E31, E32, E52, E58