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Monetary policy, productivity, and market concentration

Andrea Colciago () and Riccardo Silvestrini

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: This paper builds a New Keynesian industry dynamics model for the analysis of macroeconomic fluctuations and monetary policy. A continuum of heterogeneous firms populates the economy, markets are imperfectly competitive and nominal wages are sticky. An expansionary monetary policy shock triggers a response in labor productivity. By reducing borrowing costs, the shock initially attracts low productivity firms in the market. As a result, aggregate productivity decreases on impact. It then overshoots its initial level since, after the initial over-crowding, competition cleanses the market from low productivity firms. The overshooting amplifies the response of the main macroeconomic variables to the shock. A high ex-ante degree of market concentration partially impairs the transmission of monetary policy by disrupting the entry and exit mechanism.

Keywords: Market Concentration; Monetary Policy; Competition; Productivity (search for similar items in EconPapers)
JEL-codes: D42 E52 E58 L16 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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