Dynamic Oligopoly and Price Stickiness, November 2021
with Iván Werning
Revise and resubmit, American Economic Review
How does market concentration affect the potency of monetary policy? To tackle this question we build a model with oligopolistic sectors. We provide a formula for the response of aggregate output to monetary shocks in terms of sufficient statistics: demand elasticities, concentration, and markups. We calibrate our model to the evidence on pass-through, and find that higher concentration significantly amplifies non-neutrality. To isolate the strategic effects of oligopoly, we compare our model to one with monopolistic competition recalibrated to ensure firms face comparable demand functions. Finally, we compute an exact Phillips curve for our model. Qualitatively, our Phillips curve incorporates extra terms relative to the standard New Keynesian one. However, quantitatively, we show that a standard Phillips curve, appropriately recalibrated, provides an excellent approximation.
with Thomas Philippon
We study time-consistent bank resolution mechanisms. When interventions are ex post efficient, a government cannot commit not to inject capital into the banking system. Contrary to common wisdom, we show that the government may still avoid moral hazard and implement the first best allocation by using the distribution of bailouts across banks to provide ex ante incentives. In particular, we analyze properties of credible tournament mechanisms that provide support to the best performing banks and resolve the worst performing ones, including through mergers. Our mechanism continues to perform well if banks are partially substitutable, and if they are heterogeneous in their size, interconnections, and thus systemic risk, as long as bailout funds can be targeted to particular banks.