Market Power, Inequality, and Financial Instability

Isabel Cairo and Jae Sim

No 2020-057, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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.

Keywords: Market power; Factor shares; Income inequality; Financial instability (search for similar items in EconPapers)
JEL-codes: E21 E25 G01 (search for similar items in EconPapers)
Pages: 41
Date: 2020-08-07
New Economics Papers: this item is included in nep-com and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-57

DOI: 10.17016/FEDS.2020.057

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