Column: Dominance of mega-corporations could undermine monetary policy
LONDON (Reuters) – While zero interest rate policies by central banks and billions of dollars in bond purchases have struggled to stimulate growth and inflation for more than a decade, a tightening of monetary policy could be just as ineffective in containing them.
At least, this is what research by economists at the International Monetary Fund suggests, arguing that the growing dominance of fewer and larger firms potentially undermines the impact of central bank policies on overall economic activity and prices. .
Its findings underscore concerns that the greater concentration of mega-companies in economies, especially in the midst of the digital revolution, means that these oversized, cash-rich companies are also less sensitive to credit markets and bank lending – of which key channels through which central bank policies globally affect activity.
The implications are potentially huge.
If growth rates are significantly higher in the coming years and inflation continues to rise well above central bank targets for years to come, will central banks be forced into more severe tightening and interest rate hikes than usual to calm things down?
Or indeed, if the developed and aging world reverts to its ten-year ‘secular stagnation’ trajectory shortly after recovering from the coronavirus pandemic, how much will central banks need to push for to prevent a relapse into 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.
“More and more big and powerful companies are making monetary policy an increasingly less powerful tool for managing the economy in advanced economies, all other things being equal,” a blog post on the newspaper said.
Studying extensive data on firms in the United States and 14 other developed economies examined the impact of a firm’s “profit margin” – or its margin between selling prices and costs – on its response. major changes in monetary policy.
The concept is simple.
Firms with liquidity from larger profits and margins due to dominant market positions have less need to resort to credit and are therefore relatively insensitive to credit policy. The more companies that dominate global economic activity, the bigger the problem for central banks.
What’s new is the data crunch to show it.
For US companies, the study found that a 100 basis point hike in the Federal Reserve’s key rate led companies with low profit margins to cut sales by 2% after one year, but only had virtually no effect on the output of high-profit margin firms.
IMF members also cited other IMF research showing that global corporate margins among publicly traded companies have grown by around 30% on average since 1980 – and twice as fast in digital sectors. And they say the pandemic is likely to amplify those trends, while seeing large companies gain market share as many small businesses go bankrupt.
As an example, they pointed to heaps of cash between $ 150 billion and $ 200 billion at tech giants Apple and Alphabet.
The central bank conundrum is clear – although we’ve only seen it from an easy politics perspective in recent years.
Excessive tightening could dampen activity in the future and policymakers could destabilize or unbalance the economy and disproportionately hit small businesses and poorer households. Loosen too much and they risk exploding asset bubbles and undermining financial stability.
One obvious solution, the authors say, is to redouble our efforts to regulate competition and competition – challenging dominant firms, monopoly practices or oligopolies more squarely while scrutinizing mergers and acquisitions more diligently.
“Reducing the market power of firms would not only support recovery directly by stimulating investment, innovation and wage growth, but also indirectly by making monetary policy more powerful,” wrote IMF economists.
Antitrust and competition issues quickly climbed the list of priorities for the new administration of US President Joe Biden. China is in the midst of a massive antitrust crackdown on its tech sector. European Union regulators continue to harass Big Tech practices there.
Earlier this month, Biden signed an executive order aimed at boosting competition in the U.S. economy, including a call for regulators to take a closer look at mergers that have left major industries such as tech and health dominated by a few players.
Nearly $ 700 billion in U.S. mergers and acquisitions were announced in the second quarter alone, the highest on record, and the mergers and acquisitions frenzy is likely to be fueled by huge cash levels of businesses accumulated during pandemic lockdowns.
It is not clear whether the antitrust measures proposed in the United States and elsewhere will be sufficient to address the problem highlighted by the IMF study.
Perhaps a silver lining right now is that high-profit margin companies with big cash buffers are better able to absorb spikes in input prices or labor costs after foreclosure due to bottlenecks. supply bottleneck. By not passing these costs on to customers, they could help control consumer inflation.
But for central banks still wondering why their extraordinary and forceful monetary policies over the past decade have had less effect than they had imagined, the power of mega-corporations provides another twist on the market. story.
The author is editor-in-chief for finance and markets at Reuters News. All opinions expressed here are his.
By Mike Dolan; Editing by Frances Kerry