Markup Distribution and Aggregate Dynamics

Mario Giarda, Will Jianyu Lu and Antonio Martner

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: Using administrative firm-level data from Chile, we estimate monthly firm-level markups and document that average markups are countercyclical, driven by firms at the top of the markup distribution. To interpret these facts, we develop a New Keynesian model with heterogeneous firms, endogenous markups, and nominal rigidities. Firms with greater market power adjust prices less, amplifying and prolonging output responses through persistent markup dispersion. This amplification is stronger under high-demand superelasticity and persistent shocks. Quantitatively, the aggregate GDP response to an aggregate demand shock can be up to 20% larger than in representative-firm models.

Date: 2025-10
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