Premium
The rise of market power and Ramsey‐optimal policy implications
Author(s) -
Kiarsi Mehrab
Publication year - 2021
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/ecno.12175
Subject(s) - economics , volatility (finance) , new keynesian economics , inflation (cosmology) , monetary policy , monetary economics , market power , fiscal policy , aggregate demand , random walk , macroeconomics , keynesian economics , econometrics , microeconomics , statistics , physics , mathematics , theoretical physics , monopoly
Abstract De Loecker, Eeckhout, and Unger document that since 1980 aggregate markups in the U.S. economy have significantly increased from 21% above cost to 61% now. In light of this evidence, this paper revisits optimal fiscal and monetary policy recommendations of standard New Keynesian models and shows that under empirically relevant calibrations of market power they radically change: the optimal inflation rate becomes significantly positive and its optimal volatility sharply rises. Moreover, inflation behaves like a random walk in response to unexpected fiscal shocks. Thus, price stability ceases to be the optimal policy outcome.