Monetary Policy, Productivity, and Market Concentration

26 Pages Posted: 3 Jun 2020

See all articles by Andrea Colciago

Andrea Colciago

De Nederlandsche Bank - Research Department; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Riccardo Silvestrini

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: May 28, 2020

Abstract

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

Suggested Citation

Colciago, Andrea and Silvestrini, Riccardo, Monetary Policy, Productivity, and Market Concentration (May 28, 2020). De Nederlandsche Bank Working Paper No. 685, Available at SSRN: https://ssrn.com/abstract=3618002 or http://dx.doi.org/10.2139/ssrn.3618002

Andrea Colciago (Contact Author)

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

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Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Riccardo Silvestrini

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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