Monopsony, Income Risk and R∗ Multiplicity

Federica Romei, Ambrogio Cesa-Bianchi, Sergio de Ferra, Andrea Ferrero, Alexandre Kohlhas, Michael McMahon and Giovanni Rosso

No 20582, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a model where labor market monopsony and income risk generate multiple equilibria for the equilibrium real interest rate, R∗. Firms’ debt issuance amplifies labor income risk, making household asset demand non-monotonic. One equilibrium features higher R∗ and lower risk; another, lower R∗, higher debt, and higher risk. Policy affects equilibrium selection: central bank asset purchases lower R∗, while government debt raises it. Empirical evidence supports our prediction that asset supply changes have differing effects on interest rates before and after the Global Financial Crisis.

Keywords: Natural interest rate; Monopsony; Income risk (search for similar items in EconPapers)
JEL-codes: E21 E43 J42 (search for similar items in EconPapers)
Date: 2025-08
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