Market Power, Inequality, and Financial Instability

41 Pages Posted: 21 Aug 2020

See all articles by Isabel Cairo

Isabel Cairo

Board of Governors of the Federal Reserve System

Jae Sim

Board of Governors of the Federal Reserve System

Date Written: August, 2020

Abstract

Over the last four decades, the U.S. economy has experienced a few secular trends, each of which may be considered undesirable in some aspects: declining labor share; rising profit share; rising income and wealth inequalities; and rising household sector leverage and associated financial instability. We develop a real business cycle model and show that the rise of market power of the firms in both product and labor markets over the last four decades can generate all of these secular trends. We derive macroprudential policy implications for financial stability.

JEL Classification: E21, E25, G01

Suggested Citation

Cairo, Isabel and Sim, Jae W., Market Power, Inequality, and Financial Instability (August, 2020). FEDS Working Paper No. 2020-57, Available at SSRN: https://ssrn.com/abstract=3678341 or http://dx.doi.org/10.17016/FEDS.2020.057

Isabel Cairo (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jae W. Sim

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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