Heterogeneous Markups Cyclicality and Monetary Policy

Abstract

This paper studies aggregate markup cyclicality through firm‐level heterogeneity, reallocation, and aggregation. Using the U.S. firm data for 1990–2016, we find that markups are procyclical for young firms and countercyclical for older firms following monetary policy shocks. Economic activity also reallocates modestly toward young firms. As the firm population ages, the aggregate markup response shifts from acyclical or mildly procyclical to countercyclical. These findings help reconcile conflicting evidence on markup cyclicality and imply that firm demographics shape monetary‐policy transmission and the roles of demand and supply shocks in business cycles.