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Fourth Quarter 2022, 
Vol. 104, No. 4
Posted 2022-10-21

Credit Expansion and Markups

by YiLi Chien, Hyungsuk Lee, and Junsang Lee


This article documents new empirical facts about the effects of credit expansion on the aggregate markup and markup dispersion in the United States. We use U.S. macroeconomic data and Jordà's local projection and single-equation estimation methods. The results for both methods show that the aggregate markup and markup dispersion increase in response to both a firm debt shock and a household debt shock. The previous literature mostly focused on the effect of firm debt financing on firm markups. Extending previous research, our study shows that household credit expansion also plays a role in firm markups. This finding calls for further theoretical and analytical studies to understand the underlying mechanism regarding the effect of household credit expansion on firm markups.

YiLi Chien is a research officer and economist at the Federal Reserve Bank of St. Louis. Hyungsuk Lee is a PhD at Sungkyunkwan University, Seoul, Republic of Korea. Junsang Lee is the corresponding author and an associate professor of economics at Sungkyunkwan University, Seoul, Republic of Korea.


There has been burgeoning interest in the linkages between macroeconomic fundamentals and firm market power in the United States. In July 2021, U.S. President Biden issued Executive Order 14036 to encourage competition within the U.S. economy to lower prices. Moreover, U.S. data show that the correlation between fluctuations in the aggregate markup and household debt has increased since the Great Recession. The correlation coefficient is 0.16—only slightly positive—from 1980 to 2020, but the value increases to 0.50 from 2007 to 2020. These facts motivate us to investigate the dynamic effects of credit expansion on firm markups.

How does credit expansion affect firm market power? We try to answer this question empirically by using U.S. quarterly time-series data. By using Jordà's (2005) local projection and single-­equation estimation methods, our work studies the dynamic effects of credit expansion on the first and second moments of markup distribution. Our empirical findings show that both the aggregate markup and markup dispersion increase in response to a rise in private debt, the sum of household debt and non-financial firm debt. In addition, our findings are robust to replacing private debt with either non-financial firm debt or household debt. Namely, firm markups not only respond to changes in firm debt but also to variation in household debt. While the previous literature mostly focuses on the effect of firm debt financing on firm markups, our study makes an additional and novel contribution: Household credit expansion could also play a crucial factor in determining firm markups.

Growing evidence indicates that firm markups and market concentration have increased in the United States and in other advanced countries. Loecker, Eeckhout, and Unger (2020) estimate a sharp increase in U.S. markups and link it to several macroeconomic phenomena, including declines in the labor share. Hall (2018) presents evidence of heterogeneous rises in firm market power in U.S. industries. Gutiérrez and Philippon (2017) show a clear increase in the concentration rates of firms in the United States and its adverse macroeconomic consequences.

Previous studies mostly use a corporate finance perspective to focus on firm markups. Our empirical finding is consistent with Chevalier and Scharfstein (1996a,b), who suggest empirically that liquidity-constrained firms tend to raise markups over a downturn, to gain additional consumer surplus and hence boost their firms' liquidity reserves. Campello (2003) also shows that firms use this pricing strategy because firms heavily rely on debt financing to delay investment in response to negative shocks.

Our novel finding suggests that there is also a positive relationship between household debt and markups. One plausible explanation is that credit expansion helps relax the household budget constraint and hence increases household demand, which then induces firms to adjust their price strategies in response to the amount of household expenditure. Consistent with this explanation, Chiu, Dong, and Shao (2018) show that high consumption by credit users raises the price level in a new monetarist model: Households with higher credit spend more, resulting in higher prices. According to Wang (2016), firms post different prices as buyers bring less money with higher inflation. Because buyer demand becomes less sensitive, imperfect competitive firms have incentives to post higher markups. Our empirical results suggest that further theoretical and analytical research is required to reveal the effect of household credit expansion on markups.

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