If central bank policies of zero interest rates and trillion-dollar bond purchases struggled to fuel growth and inflation for more than a decade, tighter monetary policy may be just as ineffective in curbing them.
At least that’s what research by economists at the International Monetary Fund suggests, arguing that the growing dominance of fewer and bigger companies potentially undermines the impact of central bank policies on economic activity and prices in general.
Their findings underscore concerns that the increased concentration of mega-companies in economies, especially amid the digital revolution, means that these large, cash-rich companies are also less sensitive to credit markets and bank lending, conduits key through which central bank policies affect overall activity.
The implications are potentially huge.
If growth rates are significantly higher in the next few years and inflation continues to rise well above central bank targets for years to come, will central banks be forced to tighten and raise interest rates more than usual? to cool everything?
Or indeed, if the aging developed world reverts to its decade-long trajectory of “secular stagnation” shortly after recovering from the coronavirus pandemic, how much pressure will central banks have to push to prevent a relapse in economic growth? deflation?
“The market power of companies dampens the response of their production to monetary policy shocks,” concludes the working paper by IMF economists Romain Duval, Davide Furceri, Raphael Lee and Marina Tavares.
“Increasingly larger and more powerful companies are making monetary policy a less powerful tool for managing the economy in advanced economies, all things being equal,” says a blog about the document.
The study, using a large amount of data from companies in the United States and 14 other developed economies, analyzed the impact of a company’s “profit margin”, that is, its margin between sales prices and costs, in his response to the big changes in monetary policy.
The concept is simple.
Companies that have a lot of money thanks to their higher profits and margins due to their dominant position in the market have less need to resort to credit and are therefore relatively insensitive to credit policy. The more companies of this type dominate aggregate economic activity, the greater the problem for central banks.
The novelty is that the data shows it.
In the case of US companies, the study found that a 100 basis point increase in the official Federal Reserve interest rate led companies with low margins to reduce their sales by 2% after one year, but It had virtually no effect on the output of high-margin companies.
IMF staff also cited other IMF research showing that global corporate margins among publicly traded companies had risen 30% on average since 1980, and twice as fast in digital sectors. And they say the pandemic is likely to amplify these trends, as large companies gain market share as many small companies go bankrupt.
As an example, they point to stacks of cash of between $ 150 billion and $ 200 billion from tech giants Apple and Alphabet.
The conundrum of central banking is clear, even if we’ve only seen it from the perspective of easy politics in recent years.
If pushed too hard to cool activity in the future, policy makers could destabilize or throw the economy out of balance, disproportionately hitting smaller businesses and poorer households. If they loosen too much, they risk causing asset bubbles and undermining financial stability.
An obvious solution, according to the authors, is to redouble regulation of competition and monopolies, questioning dominant firms, monopolistic practices or oligopolies more directly, and looking more closely at mergers and acquisitions.
“Curbing the market power of firms would not only support the recovery directly, stimulating investment, innovation and wage growth, but also indirectly, making monetary policy more powerful,” the IMF economists wrote.
Competition and antitrust issues have quickly risen up the priority list of the new administration of US President Joe Biden. China is in the midst of a broad antitrust campaign in its tech sector. European Union regulators continue to harass the practices of large technology companies in that country.
Earlier this month, Biden signed a broad executive order to strengthen competition in the US economy, including a call on regulators to increase scrutiny of mergers that have left important sectors, such as technology and healthcare, dominated by a few actors.
In the second quarter alone, mergers and acquisitions worth nearly $ 700 billion were announced in the United States, the highest figure on record, and the mergers and acquisitions frenzy is likely to be fueled by huge levels. of business cash accumulated during pandemic shutdowns.
It is not clear if the antitrust measures proposed in the United States and other countries will be enough to tackle the problem pointed out by the IMF study.
A positive aspect at this time may be that companies with high profit margins and large cash reserves are better able to absorb increases in input prices or wage costs after the crisis due to bottlenecks of the offer. By not passing those costs on to customers, they could help keep consumer inflation under control.
But for central banks, still wondering why their extraordinary and forceful monetary policies of the last decade have had less effect than they imagined, the power of mega-companies marks a new turn in history.
(By Mike Dolan, edited by Frances Kerry) .. Translate serenitymarkets