The Markup Elasticity of Monetary Non-Neutrality

Abstract

Firms’ market power, measured by markups, has risen substantially and unequally across sectors. To evaluate the implications of these trends for monetary non-neutrality, we develop a quantitative menu cost model that covers multiple sectors with heterogeneous degrees of market competition. Two quantitative results stand out from the analysis. 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