The Beginning of the Trend: Interest Rates, Profits, and Markups

TL;DR

This paper examines how the choice of sample start date affects estimates of the relationship between interest rates, profits, and markups, highlighting the importance of sensitivity analysis in time-series research.

Contribution

It demonstrates that estimates of markup increases are highly sensitive to sample start dates, emphasizing the need for careful sample selection and robustness checks in empirical studies.

Findings

Markup increase from 1984 to 2019 is 14% larger than from 1980 to 2019.

Interest rate peaks in 1984 significantly influence estimates.

Sensitivity to sample start date impacts interpretation of economic trends.

Abstract

Recent highly cited research uses time-series evidence to argue the decline in interest rates led to a large rise in economic profits and markups. We show the size of these estimates is sensitive to the sample start date: The rise in markups from 1984 to 2019 is 14% larger than from 1980 to 2019, a difference amounting to a $3000 change in income per worker in 2019. The sensitivity comes from a peak in interest rates in 1984, during a period of heightened volatility. Our results imply researchers should justify their time-series selection and incorporate sensitivity checks in their analysis.