Research

Work In progress

License to Ease: Competition and Monetary Policy Interaction (Joint with Antoine Camous and  Basile Grassi). 

How do competition policy and monetary policy interact? We study their interdependence in a New Keynesian framework with oligopolistic competition. The intensity of competition affects both the slope of the Phillips Curve and the gap between natural and efficient output. In our setting, a competition authority chooses the number of firms, trading off greater competition against higher operating costs. As a result, competition policy shapes the incentives of the central bank in conducting monetary policy. We analyze the optimal institutional design in which a benevolent planner delegates authority to both the central bank and the competition authority. We characterize the optimal mandates for both institutions. We show that the competition authority’s objective should align with overall social welfare, and that the optimal central bank mandate becomes less conservative (i.e., more dovish) as the competition authority becomes more effective. Our framework rationalizes several observed patterns: (i) competition authorities’ focus on consumer welfare, (ii) more competitive economies having less conservative central banks (e.g., EU vs. US), and (iii) central banks’ recurrent calls for structural reforms in product markets. Our results call for more conservative monetary stances facing declining competition intensity.