PhD Studentship: Market Power and its Implications for the Design and Effectiveness of Monetary Policy

Over the last decade, we have observed an exponential increase in the number of studies that have investigated the extent of market power and its economic consequences at the firm, industry, and country levels. Most of these studies have reported that an increase in market power is associated with adverse effects on investment, labour share, and firm entry/exit rates (Barkai, 2020; De Loecker et al., 2020; Eggertsson et al., 2021; Gutiérrez and Philippon, 2019; Karabarbounis and Neiman, 2019; Syverson, 2019).

There has also been an increase in the number of studies reporting that the Philips Curve has become flatter during the post-1990 period (Borio et a., 2021; Lombardi et al., 2020; Heise et al., 2022) and that market power is one of the factors that causes the flattening of the Philips curve (Baqaee et al., 2021; Rubbo, 2022).

The explanation for the effects of market on the slope of the Philips Curve is based on responses of high-markup firms to monetary policy shocks. In this story, high-markup firms passthrough the effect of monetary policy to prices at lower rates compared to low-markup firms. This is because high-markup firms respond to a positive (expansionary) “demand shock” with an endogenous positive (expansionary) “supply shock” that increases output and productivity, lower inflation, and flatten the Phillips curve. Hence, the prevalence of high-markup firms is a factor that reduces the inflation cost of expansionary monetary policy or the deflation cost of contractionary monetary policy.

Yet there is emerging evidence indicating a reversal in the slope of the Philips Curve (Ari et al., 2023). Moreover, the postulated “positive supply shock” response by high-markup firms runs counter to stalling and even declining firm investment rates in the face of monetary easing after the global financial crisis and the low interest rates that persisted in the US and beyond. (Diez et al., 2018; Gutiérrez and Philippon, 2017).

Given this state of the play in the research field, the proposed research aims to contribute to the debate along four paths:

1. Utilise industry-level EU-Klems and EuroStat Datasets to trace the evolution of the sectoral Philips Curve slopes in approximately 25 industry across 20 OECD/EU countries.
2. Identify the factors that explain the time variation in the slopes of the sectoral Philips Curves, paying special attention to the role of market power at the industry level.
3. Construct a high-frequency measure of monetary policy shocks following Jarociński and Karadi (2020) at the country level.
4. Investigate the effect of monetary policy shocks on industry-level investment, paying attention to the mediating role of market power.

We test three research hypothesis in the proposed study:

H1: The slope of the Philips Curve is time-varying and it is going through a current phase of a steepening slope, indicating that the effectiveness of monetary policy in adjusting real output and employment is declining.

H2: Market power is conducive to steeper rather than flatter sectoral Philips Curves.

H3: The responsiveness of sectoral investment and productivity to monetary policy shocks is weaker in sectors with higher market power.

Please review the application requirements in advance of submission:

https://docs.gre.ac.uk/rep/communications-and-recruitment/information-on-postgraduate-research-scholarship-ref-vcs-gbs-01-04-24 

Please include your Scholarship Reference Number in your personal statement. Use part of your personal statement to elaborate on your theoretical and empirical approach to the research topic.

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