Low Interest Rates, Market Power, and Productivity Growth

90 Pages Posted: 4 Feb 2019 Last revised: 5 Feb 2019

See all articles by Ernest Liu

Ernest Liu

Princeton University - Princeton University

Atif R. Mian

Princeton University - Department of Economics; Princeton University - Woodrow Wilson School of Public and International Affairs; NBER

Amir Sufi

University of Chicago - Booth School of Business; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: January 2019

Abstract

How does the production side of the economy respond to a low interest rate environment? This study provides a new theoretical result that low interest rates encourage market concentration by giving industry leaders a strategic advantage over followers, and this effect strengthens as the interest rate approaches zero. The model provides a unified explanation for why the fall in long-term interest rates has been associated with rising market concentration, reduced business dynamism, a widening productivity-gap between industry leaders and followers, and slower productivity growth. Support for the model’s key mechanism is established by showing that a decline in the ten year Treasury yield generates positive excess returns for industry leaders, and the magnitude of the excess returns rises as the Treasury yield approaches zero.

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Suggested Citation

Liu, Ernest and Mian, Atif R. and Sufi, Amir, Low Interest Rates, Market Power, and Productivity Growth (January 2019). NBER Working Paper No. w25505. Available at SSRN: https://ssrn.com/abstract=3328328

Ernest Liu (Contact Author)

Princeton University - Princeton University ( email )

Joseph Henry House
Princeton, NJ 08542
United States

Atif R. Mian

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amir Sufi

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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