Research

Work In progress

License to Ease: Competition and the Conduct of Monetary Policy (Joint with Antoine Camous and  Basile Grassi) Draft available upon request

Monetary policy is transmitted through firms’ pricing decisions, which are shaped by the competitive environment. Competition policy affects that environment through measures that shape the degree of product-market competition. We study the interaction between competition policy and monetary policy in a New Keynesian model with oligopolistic competition. A competition authority chooses the degree of product-market competition, trading off its benefits against a resource cost, while a central bank conducts monetary policy under discretion. In this environment, competition shapes firms’ markups and strategic pricing incentives, thereby affecting both the slope of the Phillips curve and the long-run distortion that gives rise to inflation bias. We characterize the optimal institutional design when a benevolent planner delegates authority to both institutions and chooses their mandates. Our main result is that the optimal degree of central bank conservatism depends systematically on the effectiveness of competition policy. When competition can be promoted more effectively, equilibrium competition is higher, inflation bias is lower, and it is optimal to appoint a less conservative central bank. The analysis implies that competition policy and monetary policy should be jointly designed rather than in isolation.

Uninsured Creative Destruction  (Joint with Henri Graul) Draft available upon request

We propose a theory of creative destruction under incomplete markets. At its core is the observation that creative destruction shapes workers’ labor income process. When displaced workers are the economy’s savers, displacement risk moves the demand for assets and, with it, the return at which innovation is financed. In a quality-ladder model, households self-insure with a liquid bond and the stock that finances entrants. Because the stock provides worse insurance against unemployment, it pays a liquidity premium that moves firms’ discount rate and, through free entry, the pace of creative destruction. Incomplete markets can accelerate or slow creative destruction relative to complete markets, depending on whether the precautionary motive or the liquidity channel prevails. Creative destruction rises with consumption inequality, implying a trade-off between reducing inequality and sustaining growth.