Template-Type: ReDIF-Paper 1.0
Title: Markups and Marginal Costs Over the Firm Life: Implications for the Optimal Inflation Target
Author-Name: Klaus Adam
Author-Email: adam@uni-mannheim.de
Author-Name: Tobias Renkin
Author-Email: tobias.renkin@gmail.com
Author-Name: Gabriel Züllig
Author-Email: gabriel.zuellig@snb.ch

Classification-JEL: E52, L11, L13
Keywords: relative markups, marginal costs, prices over the firm life, optimal inflation

Abstract: We estimate the dynamics of relative markups, marginal costs and prices over the firm
life cycle using detailed firm data from Denmark. Relative marginal costs fall strongly
over the first 15 years of firm life, but relative prices fall only weakly because of a strong
rise in relative markups. Relative price trends thus underestimate trends in relative
productivity. This distorts recent estimates of the optimal inflation target downward
by 0.2-1.2% per year. We show that relative markups increase following the introduction
of new products and the discontinuation of old products, suggesting that product
turnover is important driver of markup dynamics at the firm level. Only about one
third of the decrease in relative marginal cost over the firm age is explained by movements
in relative productivity, with the remainder being due to non-homotheticities
and increasing returns in the production function.

Note: 
Length: 37
Creation-Date: 2025-01
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp626
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2025_626