The policymaker re-optimises 𝜆 when moving from point C to D. 38  All speeches are available online at www.bankofengland.co.uk/speeches  38  Chart 20: Impact of mark-ups on inflation and nominal interest rate volatility Standard deviation of inflation 5 D  Baseline 4 Higher mark-up shock variance  3  Higher mark-up shock variance and higher markups  2  B A  1  C 0 0  1  2  3 4 Standard deviation of policy rate  5  6  7  Sources: Galí (2008) model and Bank calculations. Notes: Parametrisation such that 𝛽 = 0.99, 𝜃 = 2/3, 𝛼 = 1/3, 𝜑 = 𝜎 =1. Standard deviation of mark-up shock increases from 0.1 to 0.125 when moving from the blue to red line. The steady-state mark-up level increases from 1.1 to 1.6 when moving from the red to the green line. The policymaker re-optimises 𝜆 when moving from point C to D.  Chart 21: Mark-ups and inflation bias Annualised inflation bias  40  30 Estimated increase in global mark-ups 20  10  0 1.0  1.2  1.4  1.6  1.8  2.0  Mark-up level Sources: De Loecker and Eeckhout (2018), Galí (2008) model and Bank calculations. Notes: Parametrisation such that 𝛽 = 0.99, 𝜃 = 2/3, 𝛼 = 1/3, 𝜑 = 𝜎 =1.
Although they capture subtly different dimensions of market power, there is a weakly positive relationship between measures of mark-up and market concentration at the sector level (Chart 4), which is statistically  6  De Loecker and Eeckhout (2018) use a dataset that largely includes publicly-traded companies, but there are also some privately held firms. 7 Similar estimates have recently been provided by Díez et al (2018). 8 OECD data. 9 De Loecker and Eeckhout (2018) estimate that mark-ups in the US are a little larger than in the UK, so the boost to UK TFP from eliminating them would be smaller than the 35% estimate for the US in Baquee and Farhi (2018), albeit of a similar order of magnitude. 10 The methodology is explained in the Appendix. The data include around a little over 1000 firms, on average, per year. These firms account for around one-third of UK employment. Their sales are equivalent to around one-third of UK turnover and around two-thirds of UK nominal GDP. We exclude financial sector firms and, having estimated mark-ups, trim outliers, i.e. those firm-level mark-ups that are below the 1st percentile and above the 99th percentile of the firm-level mark-up distribution in a given year, 5  All speeches are available online at www.bankofengland.co.uk/speeches  5  significant at the firm level. 11  The same has been found among companies in other countries (Díez et al  (2018)). This gives some degree of reassurance that the rise in measured market power has been a genuine one.