Search Results
Working Paper
Stagflationary Stock Returns
We study investors’ perceptions of inflation through the lens of a high-frequency event study, documenting they have a stagflationary view of the world. In response to higher-than-expected inflation, investors expect firms’ nominal cash flows to remain stagnant while discount rates increase, resulting in lower stock prices. Both the equity risk premium and nominal risk-free yields rise, but longer-term real yields remain unchanged. Consistent with investors interpreting inflation as a cost shock, investors expect firms with low market power to suffer larger declines in cash flows. Cash ...
Briefing
How Costly Is Rising Market Power for the U.S. Economy?
We survey the recent, active debate on market power in the U.S. economy. While typical studies on market power focused on narrow industries due to data constraints, the relevance of market power for the aggregate economy was reinvigorated by a study focusing on publicly traded firms that documented a significant rise in U.S market power since the 1980s. This article is meant to provide a bird's-eye view of the (sometimes heated) discussion on market power. Furthermore, we examine the macroeconomic consequences of a rise in U.S. market power.
Report
How Do Supply Shocks to Inflation Generalize? Evidence From the Pandemic Era in Europe
We document how the interaction of supply chain pressures, elevated household inflation expectations, and firm pricing power contributed to the pandemic-era surge in consumer price inflation in the euro area. Initially, supply chain disruptions raised inflation, particularly in manufacturing, through a cost-push channel, while also elevating inflation expectations. In turn, higher inflation expectations appear to have lowered the price elasticity of consumer demand and strengthened firms’ pricing power, enabling even firms in service sectors that were initially unaffected by supply ...
Working Paper
Distribution of Market Power, Endogenous Growth, and Monetary Policy
We incorporate incumbent innovation in a Keynesian growth framework to generate an endogenous distribution of market power across firms. Existing firms increase markups over time through successful innovation. Entrant innovation disrupts the accumulation of market power by incumbents. Using this environment, we highlight a novel misallocation channel for monetary policy. A contractionary monetary policy shock causes an increase in markup dispersion across firms by discouraging entrant innovation relative to incumbent innovation. We characterize the circumstances when contractionary monetary ...
Working Paper
Does Banking Consolidation Harm Households?
No, in the mortgage market. Using confidential micro-level data combining mortgage contracts with credit and repayment records for 44 million loans spanning 5,000 bank mergers over nearly three decades, we find no changes to mortgage rates, approval rates, or delinquency rates. Local mortgage markets remain remarkably competitive despite consolidation, averaging over 100 active lenders in each county every post-merger quarter. Our findings reveal significant merger selection motives: large acquiring banks target community banks with relationship-intensive, portfolio-lending business models, ...
Working Paper
New Estimates of the Lerner Index of Market Power for U.S. Banks
The Lerner index is widely used to assess firms' market power. However, estimation and interpretation present several challenges, especially for banks, which tend to produce multiple outputs and operate with considerable inefficiency. We estimate Lerner indices for U.S. banks for 2001-18 using nonparametric estimators of the underlying cost and profit functions, controlling for inefficiency, and incorporating banks' off-balance-sheet activities. We find that mis-specification of cost or profit functional forms can seriously bias Lerner index estimates, as can failure to account for ...
Working Paper
When Hosios Meets Phillips: Connecting Efficiency and Stability to Demand Shocks
In an economy with frictional goods and labor markets there exist a price and a wage that implement the constrained efficient allocation. This price maximizes the marginal revenue of labor, balancing a price and a trading effect on firm revenue, and this wage trades off the benefits of job creation against the cost of turnover in the labor market. We show under bargaining over prices and wages that a double Hosios condition: (i) implements the constrained efficient allocation; (ii) also minimizes the elasticity of labor market tightness and job creation to a demand shock, and; (iii) that the ...
Discussion Paper
The Origins of Market Power in DeFi
In our previous Liberty Street Economics post, we introduced the decentralized finance (DeFi) intermediation chain and explained how various players have emerged as key intermediaries in the Ethereum ecosystem. In this post, we summarize the empirical results in our new Staff Report that explains how the need for transaction privacy across the DeFi intermediation chain gives rise to intermediaries’ market power.
Working Paper
The Power to Discriminate
Economic theory has long linked employer power to discrimination, but theory and empirical applications have seldom considered which form of power matters. We distinguish between labor market and product market power and design our study to isolate the role each plays in allowing discrimination to persist. Our setting leverages job displacements from mass layoffs and firm closures as a source of exogenous job search, combined with exact matching of native–immigrant worker pairs who held the same job at the same firm, in the same occupation, industry, location, tenure and wage prior to ...
Working Paper
Dynamics of Market Power in Monetary Economies
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 ...