Monetary Policy, Productivity, and Market Concentration
26 Pages Posted: 3 Jun 2020
Date Written: May 28, 2020
This paper builds a New Keynesian industry dynamics model for the analysis of macroeconomic fluctuations and monetary policy. A continuum of heterogeneous firms populates the economy, markets are imperfectly competitive and nominal wages are sticky. An expansionary monetary policy shock triggers a response in labor productivity. By reducing borrowing costs, the shock initially attracts low productivity firms in the market. As a result, aggregate productivity decreases on impact. It then overshoots its initial level since, after the initial over-crowding, competition cleanses the market from low productivity firms. The overshooting amplifies the response of the main macroeconomic variables to the shock. A high ex-ante degree of market concentration partially impairs the transmission of monetary policy by disrupting the entry and exit mechanism.
Keywords: Market Concentration, Monetary Policy, Competition, Productivity
JEL Classification: D42, E52, E58, L16
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