IDEAS home Printed from https://ideas.repec.org/a/bla/econom/v91y2024i362p669-700.html

Market power and monetary policy transmission

Author

Listed:
  • Romain Duval
  • Davide Furceri
  • Raphaël Lee
  • Marina M. Tavares

Abstract

We show that firms' market power dampens the response of their output to monetary policy shocks, using firm‐level data for the USA and a large cross‐country firm‐level dataset for 14 advanced economies. We also find some evidence that the role of markups in monetary policy transmission, while independent from other channels, is greater for firms whose characteristics—notably size and age—are likely to be associated with greater financial constraints.

Suggested Citation

  • Romain Duval & Davide Furceri & Raphaël Lee & Marina M. Tavares, 2024. "Market power and monetary policy transmission," Economica, London School of Economics and Political Science, vol. 91(362), pages 669-700, April.
    • Handle: RePEc:bla:econom:v:91:y:2024:i:362:p:669-700
    DOI: 10.1111/ecca.12512
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/ecca.12512
    Download Restriction: no
    File URL: https://libkey.io/10.1111/ecca.12512?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. James H. Stock & Mark W. Watson, 2018. "Identification and Estimation of Dynamic Causal Effects in Macroeconomics Using External Instruments," Economic Journal, Royal Economic Society, vol. 128(610), pages 917-948, May.
    2. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    3. Mark Gertler & Simon Gilchrist, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(2), pages 309-340.
    4. Matej Bajgar & Giuseppe Berlingieri & Sara Calligaris & Chiara Criscuolo & Jonathan Timmis, 2025. "Industry concentration in Europe and North America," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 34(3), pages 407-424.
    5. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2017. "Rents, Technical Change, and Risk Premia Accounting for Secular Trends in Interest Rates, Returns on Capital, Earning Yields, and Factor Shares," American Economic Review, American Economic Association, vol. 107(5), pages 614-620, May.
    6. Azar, José & Marinescu, Ioana & Steinbaum, Marshall & Taska, Bledi, 2020. "Concentration in US labor markets: Evidence from online vacancy data," Labour Economics, Elsevier, vol. 66(C).
    7. Joseph E. Stiglitz, 2015. "New Theoretical Perspectives on the Distribution of Income and Wealth among Individuals: Part II: Equilibrium Wealth Distributions," NBER Working Papers 21190, National Bureau of Economic Research, Inc.
    8. JaeBin Ahn & Romain Duval & Can Sever, 2025. "Macroeconomic Policy, Product Market Competition, and Growth: The Intangible Investment Channel," International Journal of Central Banking, International Journal of Central Banking, vol. 21(4), pages 1-38, October.
    9. Xavier Giroud & Holger M. Mueller, 2017. "Firm Leverage, Consumer Demand, and Employment Losses During the Great Recession," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(1), pages 271-316.
    10. Farhi, Emmanuel & Gourinchas, Pierre-Olivier & Caballero, Ricardo, 2017. "Rents, Technical Change, and Risk Premia: Accounting for Secular Trends in Interest Rates, Returns to Capital, Earnings Yields," CEPR Discussion Papers 11833, C.E.P.R. Discussion Papers.
    11. David Autor & David Dorn & Lawrence F. Katz & Christina Patterson & John Van Reenen, 2017. "Concentrating on the Fall of the Labor Share," American Economic Review, American Economic Association, vol. 107(5), pages 180-185, May.
    12. Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2018. "Monetary Policy According to HANK," American Economic Review, American Economic Association, vol. 108(3), pages 697-743, March.
    13. Emin Dinlersoz & Sebnem Kalemli-Ozcan & Henry Hyatt & Veronika Penciakova, 2018. "Leverage over the Firm Life-Cycle, Firm Growth, and Aggregate Fluctuations," NBER Working Papers 25226, National Bureau of Economic Research, Inc.
    14. Emi Nakamura & Jón Steinsson, 2018. "Identification in Macroeconomics," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 59-86, Summer.
    15. Efraim Benmelech & Nittai K. Bergman & Hyunseob Kim, 2022. "Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages?," Journal of Human Resources, University of Wisconsin Press, vol. 57(S), pages 200-250.
    16. Matias Covarrubias & Germán Gutiérrez & Thomas Philippon, 2019. "From Good to Bad Concentration? US Industries over the Past 30 Years," NBER Chapters, in: NBER Macroeconomics Annual 2019, volume 34, pages 1-46, National Bureau of Economic Research, Inc.
    17. Pablo Ottonello & Thomas Winberry, 2020. "Financial Heterogeneity and the Investment Channel of Monetary Policy," Econometrica, Econometric Society, vol. 88(6), pages 2473-2502, November.
    18. Daniel A. Ackerberg & Kevin Caves & Garth Frazer, 2015. "Identification Properties of Recent Production Function Estimators," Econometrica, Econometric Society, vol. 83, pages 2411-2451, November.
    19. Maarten De Ridder & Basile Grassi & Giovanni Morzenti, 2021. "The Hitchhiker’s Guide to Markup Estimation," Working Papers 677, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    20. Germán Gutiérrez & Thomas Philippon, 2017. "Investmentless Growth: An Empirical Investigation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(2 (Fall)), pages 89-190.
    21. Xavier Giroud & Holger M. Mueller, 2017. "Firm Leverage, Consumer Demand, and Employment Losses during the Great Recession," Working Papers 17-01, Center for Economic Studies, U.S. Census Bureau.
    22. Kevin X.D. Huang & Qinglai Meng, 2014. "Returns to Scale, Market Power, and the Nature of Price Rigidity in New Keynesian Models with Self‐Fulfilling Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(2-3), pages 293-320, March.
    23. Giovanni L. Violante & Greg Kaplan, 2022. "The Marginal Propensity to Consume in Heterogeneous Agent Models," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 747-775, August.
    24. Eric M. Leeper & Todd B. Walker & Shu‐Chun Susan Yang, 2013. "Fiscal Foresight and Information Flows," Econometrica, Econometric Society, vol. 81(3), pages 1115-1145, May.
    25. Robert E. Hall, 2018. "Using Empirical Marginal Cost to Measure Market Power in the US Economy," NBER Working Papers 25251, National Bureau of Economic Research, Inc.
    26. Van Reenen, John, 2018. "Increasing differences between firms: market power and the macro-economy," LSE Research Online Documents on Economics 91698, London School of Economics and Political Science, LSE Library.
    27. Olivier Wang & Iván Werning, 2022. "Dynamic Oligopoly and Price Stickiness," American Economic Review, American Economic Association, vol. 112(8), pages 2815-2849, August.
    28. Díez, Federico J. & Fan, Jiayue & Villegas-Sánchez, Carolina, 2021. "Global declining competition?," Journal of International Economics, Elsevier, vol. 132(C).
    29. Michael Peters, 2020. "Heterogeneous Markups, Growth, and Endogenous Misallocation," Econometrica, Econometric Society, vol. 88(5), pages 2037-2073, September.
    30. Nicolas Berman & Philippe Martin & Thierry Mayer, 2012. "How do Different Exporters React to Exchange Rate Changes?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 437-492.
    31. Joseph E. Stiglitz, 2015. "New Theoretical Perspectives on the Distribution of Income and Wealth among Individuals: Part III: Life Cycle Savings vs. Inherited Savings," NBER Working Papers 21191, National Bureau of Economic Research, Inc.
    32. Sebnem Kalemli-Ozcan & Bent Sorensen & Carolina Villegas-Sanchez & Vadym Volosovych & Sevcan Yesiltas, 2015. "How to Construct Nationally Representative Firm Level Data from the Orbis Global Database: New Facts and Aggregate Implications," NBER Working Papers 21558, National Bureau of Economic Research, Inc.
    33. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-1277, November.
    34. Furceri, Davide & Loungani, Prakash & Zdzienicka, Aleksandra, 2018. "The effects of monetary policy shocks on inequality," Journal of International Money and Finance, Elsevier, vol. 85(C), pages 168-186.
    35. Cecilia R. Caglio & R. Matthew Darst & Ṣebnem Kalemli-Özcan, 2021. "Collateral Heterogeneity and Monetary Policy Transmission: Evidence from Loans to SMEs and Large Firms," NBER Working Papers 28685, National Bureau of Economic Research, Inc.
    36. Eggertsson, Gauti B. & Robbins, Jacob A. & Wold, Ella Getz, 2021. "Kaldor and Piketty’s facts: The rise of monopoly power in the United States," Journal of Monetary Economics, Elsevier, vol. 124(S), pages 19-38.
    37. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
    38. Mark Gertler & Peter Karadi, 2015. "Monetary Policy Surprises, Credit Costs, and Economic Activity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 44-76, January.
    39. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
    40. Joseph E. Stiglitz, 2015. "New Theoretical Perspectives on the Distribution of Income and Wealth among Individuals: Part I. The Wealth Residual," NBER Working Papers 21189, National Bureau of Economic Research, Inc.
    41. Romain Duval & Gee Hee Hong & Yannick Timmer & Philip Strahan, 2020. "Financial Frictions and the Great Productivity Slowdown," The Review of Financial Studies, Society for Financial Studies, vol. 33(2), pages 475-503.
    42. Joseph E. Stiglitz, 2015. "New Theoretical Perspectives on the Distribution of Income and Wealth among Individuals: Part IV: Land and Credit," NBER Working Papers 21192, National Bureau of Economic Research, Inc.
    43. Anil K Kashyap & Owen A. Lamont & Jeremy C. Stein, 1994. "Credit Conditions and the Cyclical Behavior of Inventories," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 565-592.
    44. Gustavo Grullon & Yelena Larkin & Roni Michaely, 2019. "Are US Industries Becoming More Concentrated?," Review of Finance, European Finance Association, vol. 23(4), pages 697-743.
    45. Jan De Loecker & Jan Eeckhout & Gabriel Unger, 2020. "The Rise of Market Power and the Macroeconomic Implications [“Econometric Tools for Analyzing Market Outcomes”]," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(2), pages 561-644.
    46. Mary Amiti & Oleg Itskhoki & Jozef Konings, 2019. "International Shocks, Variable Markups, and Domestic Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(6), pages 2356-2402.
    47. Philippe Aghion & Emmanuel Farhi & Enisse Kharroubi, 2019. "Monetary Policy, Product Market Competition and Growth," Economica, London School of Economics and Political Science, vol. 86(343), pages 431-470, July.
    48. Auerbach, Alan J & Gorodnichenko, Yuriy, 2013. "Measuring the Output Responses to Fiscal Policy (vol 4, pg 1, 2012)," Department of Economics, Working Paper Series qt73c8q5wx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    49. Simon Gilchrist & Egon Zakrajsek, 2012. "Credit Spreads and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 102(4), pages 1692-1720, June.
    50. David R. Baqaee & Emmanuel Farhi & Kunal Sangani, 2024. "The Supply-Side Effects of Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 132(4), pages 1065-1112.
    51. Alan J. Auerbach & Yuriy Gorodnichenko, 2013. "Corrigendum: Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 5(3), pages 320-322, August.
    52. Mertens, Karel & Ravn, Morten O., 2014. "A reconciliation of SVAR and narrative estimates of tax multipliers," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 1-19.
    53. Amit Gandhi & Salvador Navarro & David A. Rivers, 2020. "On the Identification of Gross Output Production Functions," Journal of Political Economy, University of Chicago Press, vol. 128(8), pages 2973-3016.
    54. Bond, Steve & Hashemi, Arshia & Kaplan, Greg & Zoch, Piotr, 2021. "Some unpleasant markup arithmetic: Production function elasticities and their estimation from production data," Journal of Monetary Economics, Elsevier, vol. 121(C), pages 1-14.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Canofari, Paolo & Cucculelli, Marco & Piergallini, Alessandro & Renghini, Matteo, 2025. "Tightening monetary policy and investment dynamics in the European Monetary Union: Firm- and country-level heterogeneity," Journal of Corporate Finance, Elsevier, vol. 94(C).
    2. Ben Knox & Yannick Timmer, 2024. "Stagflationary Stock Returns," CESifo Working Paper Series 11236, CESifo.
    3. Albertazzi, Ugo & Ferrando, Annalisa & Gori, Sofia & Rariga, Judit, 2025. "The cost channel of monetary policy: evidence from euro area firm-level survey data," Working Paper Series 3097, European Central Bank.
    4. Kharroubi, Enisse & Spigt, Renée & Igan, Deniz & Takahashi, Koji & Zakrajsek, Egon, 2023. "Markups and the Asymmetric Pass-Through of Cost Push Shocks," CEPR Discussion Papers 18723, C.E.P.R. Discussion Papers.
    5. Anastasia Burya & Rui Mano & Mr. Yannick Timmer & Miss Anke Weber, 2022. "Monetary Policy Under Labor Market Power," IMF Working Papers 2022/128, International Monetary Fund.
    6. Renzhi, Nuobu & Beirne, John, 2023. "Corporate market power and monetary policy transmission in Asia," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    7. Rakshit, Bijoy & Bardhan, Samaresh, 2023. "Does bank competition affect the transmission mechanism of monetary policy through bank lending channel? Evidence from India," Journal of Asian Economics, Elsevier, vol. 86(C).
    8. Ferrando, Annalisa & McAdam, Peter & Petroulakis, Filippos & Vives, Xavier, 2021. "Product market structure and monetary policy: evidence from the Euro Area," Working Paper Series 2632, European Central Bank.
    9. Marcel Takoulac Kamta & Willi Verlaine Dongho Wamba Tejio & Dinah Gembom Phungeh & Gautier Tchoffo Tameko, 2023. "Bank Profitability and Monetary Policy Transmission in Cameroon," Economic Research Guardian, Mutascu Publishing, vol. 13(2), pages 72-81, December.
    10. Mehmet Selman Colak & Abdullah Kazdal & Unal Seven & Muhammed Hasan Yilmaz, 2025. "Market Concentration and Firm Markups: Micro Evidence from an Emerging Market with Inflationary Pressures," Working Papers 2501, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    11. Okan Akarsu & Emrehan Aktug & Muserref Kucukbayrak, 2025. "Hand-to-Mouth Households in the Eurosystem and the Transmission of Monetary Policy," Working Papers 2506, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    12. Uluc Aysun & Zeynep Yom, 2025. "Technology creation, business cycles and monetary transmission," Villanova School of Business Department of Economics and Statistics Working Paper Series 61, Villanova School of Business Department of Economics and Statistics.
    13. Uluc Aysun & Sewon Hur & Zeynep Yom, 2025. "Technology creation and monetary transmission," Working Papers 2025-02, University of Central Florida, Department of Economics.
    14. Viacheslav Kramkov, 2023. "Does CPI disaggregation improve inflation forecast accuracy?," Bank of Russia Working Paper Series wps112, Bank of Russia.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ian Goldin & Pantelis Koutroumpis & François Lafond & Julian Winkler, 2024. "Why Is Productivity Slowing Down?," Journal of Economic Literature, American Economic Association, vol. 62(1), pages 196-268, March.
    2. Eggertsson, Gauti B. & Robbins, Jacob A. & Wold, Ella Getz, 2021. "Kaldor and Piketty’s facts: The rise of monopoly power in the United States," Journal of Monetary Economics, Elsevier, vol. 124(S), pages 19-38.
    3. Díez, Federico J. & Fan, Jiayue & Villegas-Sánchez, Carolina, 2021. "Global declining competition?," Journal of International Economics, Elsevier, vol. 132(C).
    4. Kouvavas, Omiros & Osbat, Chiara & Reinelt, Timo & Vansteenkiste, Isabel, 2021. "Markups and inflation cyclicality in the euro area," Working Paper Series 2617, European Central Bank.
    5. Priit Jeenas, 2023. "Firm Balance Sheet Liquidity, Monetary Policy Shocks, and Investment Dynamics," Working Papers 1409, Barcelona School of Economics.
    6. Maarten De Ridder, 2024. "Market Power and Innovation in the Intangible Economy," American Economic Review, American Economic Association, vol. 114(1), pages 199-251, January.
    7. Corhay, Alexandre & Kung, Howard & Schmid, Lukas, 2025. "Q: Risk, rents, or growth?," Journal of Financial Economics, Elsevier, vol. 165(C).
    8. Saleem Bahaj & Angus Foulis & Gabor Pinter & Paolo Surico, 2018. "Employment and the Collateral Channel of Monetary Policy," Discussion Papers 1832, Centre for Macroeconomics (CFM).
    9. Max Breitenlechner & Martin Geiger & Mathias Klein, 2024. "The Fiscal Channel of Monetary Policy," Working Papers 2024-07, Faculty of Economics and Statistics, Universität Innsbruck.
    10. Bahaj, Saleem & Foulis, Angus & Pinter, Gabor & Surico, Paolo, 2022. "Employment and the residential collateral channel of monetary policy," Journal of Monetary Economics, Elsevier, vol. 131(C), pages 26-44.
    11. Lu, Dong & Tang, Huoqing & Zhang, Chengsi, 2023. "China's monetary policy surprises and corporate real investment," China Economic Review, Elsevier, vol. 77(C).
    12. Ferrando, Annalisa & McAdam, Peter & Petroulakis, Filippos & Vives, Xavier, 2021. "Product market structure and monetary policy: evidence from the Euro Area," Working Paper Series 2632, European Central Bank.
    13. Thomas Hasenzagl & Luis Perez, 2023. "The Micro-Aggregated Profit Share," Papers 2309.12945, arXiv.org, revised Nov 2023.
    14. Cali,Massimiliano & Presidente,Giorgio, 2023. "Product Market Monopolies and Labor Market Monopsonies," Policy Research Working Paper Series 10388, The World Bank.
    15. Gutiérrez, Germán & Jones, Callum & Philippon, Thomas, 2021. "Entry costs and aggregate dynamics," Journal of Monetary Economics, Elsevier, vol. 124(S), pages 77-91.
    16. Alisdair McKay & Christian K. Wolf, 2023. "What Can Time‐Series Regressions Tell Us About Policy Counterfactuals?," Econometrica, Econometric Society, vol. 91(5), pages 1695-1725, September.
    17. Şebnem Kalemli-Özcan & Luc Laeven & David Moreno, 2022. "Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis," Journal of the European Economic Association, European Economic Association, vol. 20(6), pages 2353-2395.
    18. Cascaldi-Garcia, Danilo, 2025. "Forecast revisions as instruments for news shocks," Journal of Monetary Economics, Elsevier, vol. 151(C).
    19. Michał Gradzewicz & Jakub Mućk, 2020. "Unravelling the markups changes: the role of demand elasticity and concentration," NBP Working Papers 334, Narodowy Bank Polski.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:econom:v:91:y:2024:i:362:p:669-700. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.