Dynamics of Market Power in Monetary Economies

Jyotsana Kala (), Lucie Lebeau and Lu Wang ()

No 2501, Working Papers from Federal Reserve Bank of Dallas

Abstract: We study the dynamic interplay between monetary policy and market power in a decentralized monetary economy. Building on Choi and Rocheteau (2024), our key innovation is to model rent seeking as a process that takes time, allowing market power to evolve gradually. Our model predicts that a gradual reduction in the nominal interest rate causes a simultaneous increase in rent-seeking effort and producers’ market power, consistent with the stylized correlation observed in the U.S. over the last few decades. Producer entry can however reverse this relation in the short run, and neutralize it in the long run. Indeterminacy and hysteresis emerge when consumers benefit from valuable outside options, with short-run monetary policy shocks potentially locking the economy into high- or low-market-power equilibria in the long run.

Keywords: search; money; market power; monetary policy (search for similar items in EconPapers)
JEL-codes: D82 D83 E40 E50 (search for similar items in EconPapers)
Pages: 42
Date: 2025-01-07
New Economics Papers: this item is included in nep-cba, nep-com, nep-dge, nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:99409

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DOI: 10.24149/wp2501

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