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.