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Market Power, Inequality, and Financial Instability

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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.

Suggested Citation

  • Isabel Cairó & Jae W. Sim, 2020. "Market Power, Inequality, and Financial Instability," Finance and Economics Discussion Series 2020-057, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2020-57
    DOI: 10.17016/FEDS.2020.057
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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • G01 - Financial Economics - - General - - - Financial Crises

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