Blog Post

Monetary policy and superstar firms

The yearly Jackson Hole gathering of central bankers has focused this year on the topic of changing market structure, the rise of superstar firms, and the implications of the way they compete for central banks.

By: Date: September 4, 2018 Topic: Global Economics & Governance

Last year, David Autor et al. suggested a new interpretation of the fall in the labour share based on the rise of “superstar firms.” If globalisation or technological changes give an advantage to the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms with high profits and a low share of labour in firm value-added and sales. As the importance of superstar firms increases, the aggregate labour share will tend to fall. Industry sales will increasingly concentrate in a small number of firms; industries where concentration rises most will have the largest declines in the labour share; the fall in the labour share will be driven largely by between-firm reallocation rather than (primarily) a fall in the unweighted mean labour share within firms; the between-firm reallocation component of the fall in the labour share will be greatest in the sectors with the largest increases in market concentration; and finally, such patterns will be observed not only in US firms, but also internationally. They presented evidence in support for all of these predictions.

John van Reenen argues that understanding macroeconomic outcomes requires taking into account the large (and increasing) differences between firms, which stem in large part from heterogeneous productivity rooted in managerial and technological capabilities. In recent decades the differences between firms in terms of their relative sales, productivity and wages appear to have increased in the US and many other industrialised countries. Higher sales concentration and apparent increases in aggregate mark-ups have led to the concern that product market power has risen substantially, which is a potential explanation for the falling labour share of GDP, sluggish productivity growth and other indicators of declining business dynamism. Van Reenen suggests that this conclusion is premature, and that many of the patterns are consistent with a more nuanced view where many industries have become “winner take most/all” due to globalisation and new technologies, rather than a generalised weakening of competition due to relaxed antitrust rules or rising regulation.

Alberto Cavallo studies how online competition, with its shrinking margins, algorithmic pricing technologies, and the transparency of the web, can change the pricing behaviour of large retailers in the US and affect aggregate inflation dynamics. In particular, he shows that in the past 10 years online competition has raised both the frequency of price changes and the degree of uniform pricing across locations. For monetary policy and those interested in inflation dynamics, the implication is that retail prices are becoming more sensitive to aggregate “nationwide” shocks, increasing the pass-through of both gas prices and nominal exchange rate fluctuations.

Source: Cavallo (2018)

Andrew Haldane et al. explore the effects of market power on monetary policy, using counterfactual policy simulations and adaptations of a New Keynesian model. Taken together, their evidence suggests that an increase in market power and mark-ups could have potentially important consequences for the economy and for policy. Haldane et al. look at the different effects that a secular rise in mark-ups could have on the Phillips curve and the output/inflation policy trade-off. Taken together, the net effect of increased market power could be a potentially significant rise in inflation (but less so output) variability, relative to the counterfactual case of stable and static mark-ups. As for monetary policy, Haldane et al. discuss two ways in which the path of monetary policy could be potentially affected by an increase in market power.

Antoinette Schoar looks at the financial market, argues that the rapid growth of new digital technologies has created a market dynamic, where many institutions outside the central bank system might soon have much more comprehensive, more accurate and also more timely information than the regulators. Companies like Google or Amazon can use their data to predict regional sales growth or job losses. Google Trends is just one example of the power of aggregation from individual search information. This poses a challenge going forward that is structural and intellectual. On the one hand we need to think about how central banks can get visibility of the types of data that private-sector institutions are collecting as part of their core business. On the intellectual side the availability of this hyper-granular data asks for a new way of building economic models based on individual purchase or borrowing decisions. This is a challenge to the whole field of (macro)economics.

Also looking at the financial market, Corbae and Levine find that an intensification of competition increases the efficiency and fragility of banks; that economies can avoid the fragility costs of competition by enhancing bank governance and tightening leverage requirements; and that the monetary transmission mechanism is materially shaped by bank competition, in that bank lending responds more aggressively to central-bank-induced changes in interest rates in more competitive environments. Their research stresses the importance of regulations that improve bank governance, because these boost efficiency and stability but also show how important it would be to explicitly account for the structure of the banking system when assessing regulatory and monetary policy.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More by this author

Blog Post

Is an electric car a cleaner car?

An article published by the Ifo Institute in Germany compares the carbon footprint of a battery-electric car to that of a diesel car, and argues a higher share of electric cars will not contribute to reducing German carbon dioxide emissions. Respondents rejected the authors’ calculations as unrealistic and biased, and pointed to a series of studies that conclude the opposite. We summarise the article and responses to it.

By: Michael Baltensperger Topic: Energy & Climate, Innovation & Competition Policy Date: May 13, 2019
Read article More on this topic More by this author

Blog Post

All eyes on the Fed

Last week the US Federal Reserve left the federal funds rate unchanged and lowered the interest rate on excess reserves. We review economists’ recent views on the monetary policy conduct and priorities of the United States’ central bank system.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: May 6, 2019
Read article More on this topic More by this author

Blog Post

Is this blog post legal (under new EU copyright law)?

How new EU rules on using snippets from news publishers and on copyright infringement liability might affect circulation of information, revenue distribution, market power and EU business competitiveness.

By: Catarina Midoes Topic: European Macroeconomics & Governance Date: April 8, 2019
Read article More on this topic More by this author

Blog Post

Secular stagnation and the future of economic stabilisation

Larry Summers’ and Łukasz Rachel’s most recent study documents a secular fall in neutral real rates in advanced economies. According to the authors, this fall would be even more marked in the absence of offsetting fiscal policies. Policymaking in a world of permanently low interest rates may be hard to navigate, especially in troubled waters. We review economists’ views on the matter

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: April 1, 2019
Read article More on this topic More by this author

Opinion

China’s debt is still piling up – and the pile-up is getting faster

With looser monetary policy, China's policymakers hope to encourage banks to lend more to the private sector. This seems to imply a change from the deleveraging drive begun in mid-2017. Although this should be good news for China's growth in the short term, such a continued accumulation of debt cannot but imply deflationary pressures and a lower potential growth further down the road.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: March 19, 2019
Read article More on this topic More by this author

Blog Post

Greening monetary policy: An alternative to the ECB’s market-neutral approach

The ECB’s market-neutral approach to monetary policy undermines the general aim of the EU to achieve a low-carbon economy. An alternative tilting approach would foster low-carbon production, accelerating the transition of the EU to a low-carbon economy, and could be implemented without undue interference with the chief aim of price stability.

By: Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: February 21, 2019
Read article More on this topic More by this author

Podcast

Podcast

Deep Focus: A greener monetary policy approach for the ECB

Bruegel fellow Dirk Schoenmaker walks Sean Gibson and 'The Sound of Economics' listeners through his latest working paper, focusing on how to make monetary policy in Europe more climate-friendly

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: February 21, 2019
Read article Download PDF More by this author

Working Paper

Greening monetary policy

The author proposes a tilting approach to steer the allocation of the Eurosystem’s assets and collateral towards low-carbon sectors, which would reduce the cost of capital for these sectors relative to high-carbon sectors. Central banks have already started to look at climate-related risks in the context of financial stability. Should they also take the carbon intensity of assets into account in the context of monetary policy?

By: Dirk Schoenmaker Topic: Energy & Climate, European Macroeconomics & Governance Date: February 19, 2019
Read article More on this topic More by this author

Blog Post

On Modern Monetary Theory

An old debate is back with a kick. The discussion around modern monetary theory first gained traction in the economic blogosphere around 2012. Recent interventions in the US and UK political arenas rekindled the interest in the heterodox theory that is now seeping into mainstream debates.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 11, 2019
Read article More on this topic More by this author

Blog Post

The American tax debate

The debate over two different proposals for tax reforms: Senator Elizabeth Warren’s plan for a tax on wealth, and Congresswoman Alexandria Ocasio-Cortez’s plan for a higher top marginal tax rate on income

By: Enrico Bergamini Topic: Global Economics & Governance Date: February 4, 2019
Read article More on this topic More by this author

Blog Post

Brexit: Now for something completely different?

The life of Brexit. After a week of ECJ rulings, delayed votes, Theresa May’s errands across Europe and the vote of no confidence, we review the latest economists’ opinions to try to make sense of what has changed and what hasn’t.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: December 17, 2018
Read article More on this topic

Opinion

Can virtual currencies challenge the dominant position of sovereign currencies?

Marek Dabrowski and Lukasz Janikowski analyse why private money has historically failed in competition against sovereign currencies and what it means for modern virtual currencies, such as Bitcoin.

By: Marek Dabrowski and Łukasz Janikowski Topic: European Macroeconomics & Governance Date: December 15, 2018
Load more posts