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Distribution of Market Power, Endogenous Growth, and Monetary Policy

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  • Yumeng Gu
  • Sanjay R. Singh

Abstract

We incorporate incumbent innovation in a Keynesian growth framework to generate an endogenous distribution of market power across firms. Existing firms increase markups over time through successful innovation. Entrant innovation disrupts the accumulation of market power by incumbents. Using this environment, we highlight a novel misallocation channel for monetary policy. A contractionary monetary policy shock causes an increase in markup dispersion across firms by discouraging entrant innovation relative to incumbent innovation. We characterize the circumstances when contractionary monetary policy may increase misallocation.

Suggested Citation

  • Yumeng Gu & Sanjay R. Singh, 2024. "Distribution of Market Power, Endogenous Growth, and Monetary Policy," Working Paper Series 2024-09, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:97992
    DOI: 10.24148/wp2024-09
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    References listed on IDEAS

    as
    1. Feenstra, Robert C., 2003. "A homothetic utility function for monopolistic competition models, without constant price elasticity," Economics Letters, Elsevier, vol. 78(1), pages 79-86, January.
    2. Basu, Susanto & Fernald, John G., 2002. "Aggregate productivity and aggregate technology," European Economic Review, Elsevier, vol. 46(6), pages 963-991, June.
    3. Sushant Acharya & Julien Bengui & Keshav Dogra & Shu Lin Wee, 2022. "Slow Recoveries and Unemployment Traps: Monetary Policy in a Time of Hysteresis," The Economic Journal, Royal Economic Society, vol. 132(646), pages 2007-2047.
    4. Queralto, Albert, 2020. "A model of slow recoveries from financial crises," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 1-25.
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    Keywords

    monetary policy; markup dispersion; allocative efficiency; market power;
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