(The author is editor-at-large for finance and markets at
Reuters News. Any views expressed here are his own)
LONDON, July 23 (Reuters) - If central banks' policies of
zero interest rates and trillions of dollars of bond buying
struggled to lift growth and inflation for over a decade,
tighter monetary policy may be equally inefficient in reining
At least that's what research by International Monetary Fund
economists suggests, arguing the increasing dominance of fewer
and larger companies potentially undermines the impact of
central bank policies on overall economic activity and prices.
Its findings underline concerns that the greater
concentration of mega firms in economies, especially in the
midst of the digital revolution, mean these outsized cash-rich
businesses are also less sensitive to credit markets and bank
lending - key conduits through which central bank policies
affect overall activity.
The implications are potentially huge.
If growth rates are significantly higher in the years ahead
and inflation keeps rising well above central bank targets for
years, will central banks be forced into more severe tightening
and interest rate rises than usual to cool it all down?
Or indeed if the ageing, developed world reverts to its
decade-long path of "secular stagnation" shortly after bouncing
back from the coronavirus pandemic, how hard will central banks
have to push to prevent a relapse into deflation?
"Firms' market power dampens the response of their output to
monetary policy shocks," concluded the working paper from IMF
economists Romain Duval, Davide Furceri, Raphael Lee and Marina
"Ever larger and more powerful companies are making monetary
policy a less potent tool for managing the economy in advanced
economies, all else equal," a blog on the paper said.
The study of reams of company data from the United States
and 14 other developed economies looked at the impact of a
firm's "markup" - or its margin between selling prices and costs
- on its response to big changes in monetary policy.
The concept is straightforward.
Companies flush with cash from bigger profits and margins
due to dominant market positions have less need to rely on
credit and are relatively insensitive to credit policy as a
result. The more of those firms that dominate aggregate economic
activity, the bigger the problem for central banks.
What's new is the data crunch to show it.
For U.S. businesses, the study found a 100 basis point rise
in the Federal Reserve's policy rate led to firms with low
markups to cut sales by 2% after a year but had virtually no
effect on the output of high markup firms.
The IMF staffers also cited other IMF research showing
global corporate markups among publicly-listed firms had
increased by some 30% on average since 1980 - and twice as fast
in the digital sectors. And they say the pandemic is likely to
amplify these trends, while seeing larger corporations gain
market share as many small businesses go bust.
As an example, they pointed to cash piles of between $150
billion and $200 billion at tech giants Apple and
The central banking conundrum is clear - even if we've only
seen it from the easy policy perspective in recent years.
Tighten too much to cool activity in future and policymakers
could destabilise or unbalance the economy and hit smaller
companies and poorer households disproportionately. Loosen too
much and they risk blowing asset bubbles and undermining
An obvious solution, according to the authors, is to double
down on competition and antitrust regulation - challenging
dominant companies, monopolistic practises or oligopolies more
squarely while scrutinizing mergers and acquisitions more
"Curbing corporate market power would not only support the
recovery directly by stimulating investment, innovation and wage
growth, but also indirectly by making monetary policy more
powerful," the IMF economists wrote.
Antitrust and competition issues have rapidly moved up the
priority list of U.S. President Joe Biden's new administration.
China is in the midst of a sweeping antitrust crackdown on its
technology sector. European Union regulators continue to harry
the practises of Big Tech there.
Earlier this month, Biden signed a sweeping executive order
to bolster competition within the U.S. economy, including a call
for regulators to increase scrutiny of mergers that have left
major sectors such as technology and healthcare dominated by few
Almost $700 billion worth of U.S. mergers and acquisitions
were announced in the second quarter alone, the highest on
record, and the M&A frenzy is likely to be fuelled by huge
levels of corporate cash built up over pandemic lockdowns.
It's not clear whether the proposed antitrust moves in the
United States and elsewhere will be enough to tackle the problem
outlined by the IMF study.
A silver lining right now may be that high markup companies
with big cash buffers are better able to absorb post-lockdown
surges in input prices or wage costs due to supply bottlenecks.
By not passing on those costs to customers, they could help keep
consumer inflation in check.
But for central banks still puzzling over why their
extraordinary and forceful monetary policies over the past
decade have had less effect than they imagined, the power of
mega companies provides yet another twist in the tale.
(By Mike Dolan
Editing by Frances Kerry)