Working Paper

Market Power, Inequality, and Financial Instability

Abstract: Over the last four decades, the U.S. economy has experienced a few secular trends, each of which may be considered undesirable in some aspects: declining labor share; rising profit share; rising income and wealth inequalities; and rising household sector leverage and associated financial instability. We develop a real business cycle model and show that the rise of market power of the firms in both product and labor markets over the last four decades can generate all of these secular trends. We derive macroprudential policy implications for financial stability.

Keywords: Market power; Factor shares; Income inequality; Financial instability;

JEL Classification: E21; E25; G01;

https://doi.org/10.17016/FEDS.2020.057

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2020-08-07

Number: 2020-057