Market Power, Inequality, and Financial Instability

A new report from two economists at the Federal Reserve concludes that over the last four decades, the U.S. economy has experienced a few secular trends, each of which may be considered undesirable in some aspects: declining labor share; rising profit share; rising income and wealth inequalities; and rising household sector leverage, and associated financial instability. The authors develop a real business cycle model and show that the rise of market power of the firms in both product and labor markets over the last four decades, can generate all of these secular trends. They derive macroprudential policy implications for financial stability.