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Monopsony, Income Risk and R∗ Multiplicity

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  • Romei, Federica
  • Cesa-Bianchi, Ambrogio
  • de Ferra, Sergio
  • Ferrero, Andrea
  • Kohlhas, Alexandre
  • McMahon, Michael
  • Rosso, Giovanni

Abstract

We develop a model where labor market monopsony and income risk generate multiple equilibria for the equilibrium real interest rate, R∗. Firms’ debt issuance amplifies labor income risk, making household asset demand non-monotonic. One equilibrium features higher R∗ and lower risk; another, lower R∗, higher debt, and higher risk. Policy affects equilibrium selection: central bank asset purchases lower R∗, while government debt raises it. Empirical evidence supports our prediction that asset supply changes have differing effects on interest rates before and after the Global Financial Crisis.

Suggested Citation

  • Romei, Federica & Cesa-Bianchi, Ambrogio & de Ferra, Sergio & Ferrero, Andrea & Kohlhas, Alexandre & McMahon, Michael & Rosso, Giovanni, 2025. "Monopsony, Income Risk and R∗ Multiplicity," CEPR Discussion Papers 20582, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20582
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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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