The gap between the price that a firm charges for a product and the cost of producing one more unit is called its markup. Markups are not the same as profits: companies must still pay wages, rent and other expenses. But this measure helps us to understand whether changes in businesses’ costs are being passed on to customers through prices.
In my recent research with Andrea Chiavari (University of Oxford) and Danila Smirnov (International Monetary Fund), we examine how different firms’ markups change in response to economic shocks that affect their costs. In particular, we explore whether there is variation in companies’ responses by their age (Chiavari et al, 2026).
We study quarterly data from publicly listed US companies between 1990 and 2016. We match these accounts with unexpected changes in monetary policy around announcements by America’s central bank, the Federal Reserve (the Fed). Focusing on surprises helps to separate the response to an interest rate decision from other events affecting firms at the same time.
What happens inside firms?
When the Fed raises interest rates to cool the economy, older, more established firms tend to increase their markups, a behavioural response known as countercyclical. On the other hand, younger firms often do the opposite and lower their markups.
The difference by firms’ age is clear: after an unexpected policy tightening equivalent to a 0.25 percentage point rate rise, older firms increase their markups by as much as 3.8%; younger firms reduce theirs by as much as 2%. Company age predicts this contrast more clearly than size, debt or cash holdings.
This difference may exist for a variety of reasons, all related to the fact that young and old companies face different pressures. Young firms are often more desperate for cash flow and might cut prices to keep money coming in when credit gets tight. But older firms have more loyal customers and more market power, which means that they can keep prices high even when the economy slows.
Crucially, the business world is getting much older. There are fewer new companies starting up today than in the past, and existing firms are staying in business longer. Because these older firms now represent a much larger share of the economy – from 60% in the 1990s to 82% by 2016 – their behaviour may now dominate the national trend.
Why does this matter?
Before 2000, when younger companies were more prominent, the average markup across firms barely moved after an interest rate rise and may even have fallen slightly. After 2000, as older companies became more dominant, it rose when policy tightened and the economy slowed.
This changing mix of firms helps to explain why earlier research reached apparently conflicting conclusions. Studies covering many post-war decades often find that there is little movement in overall markups or that they move with the economy. Studies focused on more recent years are more likely to find that markups rise during slowdowns. The results need not contradict one another since they may describe economies with different business populations.
The findings also matter for central banks because markups connect companies’ pricing choices to inflation. In a very simple calculation, a tightening of 0.25 percentage points lowers inflation by about 0.07 percentage points before 2000 and 0.11 points afterwards.
But this does not mean that an ageing business population always makes monetary policy more powerful, as our calculation isolates one channel and holds the rest of the economy fixed. Interest rates also affect borrowing, investment, employment and how quickly prices adjust.
What should happen next?
Policy-makers and central banks may need to start paying closer attention to firm demographics. Most standard economic models treat all companies as if they are the same, but our research proves that a one-size-fits-all view misses a vital part of the story.
The next task is to understand why age matters. More detailed information on prices, customers, borrowing conditions and cash flow could distinguish financial pressure from customer loyalty. Evidence covering private firms, the period after 2016 and countries with different rates of business creation would show how widely the result applies.
Future research should focus on building better models that account for the differences between young and old companies. As the US and other major economies continue to age, understanding how the birth and death of companies affects the national economy will be essential for making sure that interest rate changes have the intended effect. Central banks must recognise that in an ageing economy, they may need to push harder on the brakes to get the same result.
