Distribution of Market Power, Endogenous Growth, and Monetary Policy

Yumeng Gu () and Sanjay Singh

No 2024-09, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We incorporate incumbent innovation in a Keynesian growth framework to generate an endogenous distribution of market power across firms. Existing firms increase markups over time through successful innovation. Entrant innovation disrupts the accumulation of market power by incumbents. Using this environment, we highlight a novel misallocation channel for monetary policy. A contractionary monetary policy shock causes an increase in markup dispersion across firms by discouraging entrant innovation relative to incumbent innovation. We characterize the circumstances when contractionary monetary policy may increase misallocation.

Keywords: monetary policy; markup dispersion; allocative efficiency; market power (search for similar items in EconPapers)
Pages: 85
Date: 2024-02-01
New Economics Papers: this item is included in nep-cba, nep-com, nep-fdg, nep-gro, nep-mon and nep-sbm
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DOI: 10.24148/wp2024-09

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