Working Paper

Dynamics of Market Power in Monetary Economies

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;

JEL Classification: D82; D83; E40; E50;

https://doi.org/10.24149/wp2501

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2025-01-07

Number: 2501