We incorporate incumbent innovation in a Keynesian growth framework to generate an endogenous distribution of market power across firms. Existing firms increase markups over time through successful innovation. Entrant innovation disrupts the accumulation of market power by incumbents. Using this environment, we highlight a novel misallocation channel for monetary policy. A contractionary monetary policy shock causes an increase in markup dispersion across firms by discouraging entrant innovation relative to incumbent innovation. We characterize the circumstances when contractionary monetary policy may increase misallocation.
Suggested citation:
Gu, Yumeng, and Sanjay R. Singh. 2024. “Distribution of Market Power, Endogenous Growth, and Monetary Policy.” Federal Reserve Bank of San Francisco Working Paper 2024-09. https://doi.org/10.24148/wp2024-09