Shiv Chowla - Academia.edu (original) (raw)
Papers by Shiv Chowla
In his recent book, Raghu Rajan blames neglect of the Third Pillar of societycommunityrelative to... more In his recent book, Raghu Rajan blames neglect of the Third Pillar of societycommunityrelative to the market and the state (the first two pillars) for rising societal disconnection and mistrust. 3 Rajan is right. Economic policymakers, including central banks, have a pivotal role to play in resurrecting that Third Pillar, in making economic policy local, to better support our economies and societies. Here is how. Mapping the Economy Let me begin with some simple mapping of the economy. The most widely-used metric of economic success is Gross Domestic Product (GDP). 4 In simple terms, this measures how much the average person has available to spend on the good things in life. If asked, most people would say this is a decent, if partial, proxy for their overall economic health, even if they express bafflement at the concept of GDP. Aggregate GDP is far from being the only possible proxy for economic health. The lived experience of most people depends on more than their income. A rich strand of literature has developed alternative measures of people's well-being. As well as economic and financial health, these measures include physical and mental health, their families, friends and communities. 5 This work tells us that people's sense of well-being, if not their GDP, is shaped by local factors, underpinned by the Third Pillar. Another reason why aggregate GDP may not chime with most people's lived experience is because, by definition, most people are not "average". Economists use the idea of the average or representative agent as a convenient shortcut. But that agent is a fiction. People's lived experiences often differ very materially, even within a single country or regionspatially, socially and financially. For most people's everyday lives and everyday decisions, all economics is local. These imperfections in GDP are well-understood. They certainly do not fatally undermine its usefulness as a means of keeping economic score. They do, however, suggest it can usefully be complemented by looking at the economy through different lenses. One of those different lenses comes from mapping the economy bottom-up, rather than top-down, aggregating microscopic experiences into a macroscopic view. In medicine, we use a variety of different tools, at different resolutions, to diagnose problems and when prescribing solutions: thermometers, blood pressure monitors, X-rays, CT scans, ultrasound and blood tests. Rarely does one of these measures provide all of the diagnostic answers. Using them in combination can, however, help reach robust clinical conclusions. And that "micro-to-macro" approach is commonplace when understanding other complex adaptive systems like the body, natural, physical and social. 3 Rajan (2019). 4 Coyle (2014).
The UK economy is closely integrated into the wider global economy. These ties mean that global d... more The UK economy is closely integrated into the wider global economy. These ties mean that global developments affect the economic fortunes of the United Kingdom. This article presents model-based estimates which suggest that world shocks have driven around two thirds of the weakness in UK output since 2007. Trade linkages are an important channel for the transmission of world shocks to the UK economy. But financial linkages and spillovers through uncertainty are significant, too — and together are likely to account for the majority of the impact of world shocks on the United Kingdom since 2007.
The topic for this panel is the link between developments in product markets and monetary policy.... more The topic for this panel is the link between developments in product markets and monetary policy. It is a great one. A lot of attention has been paid by central bankers over recent years to the relationship between labour markets and monetary policy (for example, Yellen (2014) and Constâncio (2017)). And rightly so. The relationship between monetary policy and product markets has, by comparison, been the road less travelled. 1,2 Labour markets have been subject to big structural shifts over recent years, including the secular fall in the degree of worker unionisation in a number of industries (for example, Schnabel (2013)), the emergence of the so-called "gig economy" (for example, Taylor (2017) and Katz and Krueger (2017)) and secular rise in the degree of globalisation and automation in the workplace (for example, Brynjolfsson and McAfee (2014) and Acemoglu and Restrepo (2018)). Each of these shifts has led to a change in employment patterns and tenures and in workers' bargaining power. These structural shifts have been used to help explain the secular fall in labour's share of national income and the recent weakness of wage growth across a number of advanced economies (for example, Dao et al (2017) and Abdih and Danninger (2017)). 3 They have also been used to justify potential shifts in the position and/or the slope of the Phillips curve (for example, Blanchard (2016) and Kuttner and Robinson (2010)). Each of these potentially has a bearing on the setting of monetary policy. Yet, over the same period, structural shifts in the product market have been no less profound. They include the emergence of highly-integrated global supply chains, increasing the degree of specialisation of product markets (Baldwin (2016)); the blossoming of companies benefitting from global network economies of scale and scope, who acquire "superstar" status (Autor et al (2017)); and the rapid emergence of e-commerce and price-comparison technology (Cavallo (2017)). The associated shifts in market power, too, might plausibly have altered some of the key macroeconomic relationships in the economy (De Loecker and Eeckhout (2017)). They may have influenced the pricing and provision of goods and services in the economy and hence the Phillips curve. And they may have influenced the amount of investment and innovation undertaken by firms and hence the aggregate demand curve (Aghion et al (2005)). They, too, might thus have a bearing on the setting of monetary policy. These structural shifts in product and labour markets may, in some cases, have had common cause. For example, network economies of scale and scope could potentially have increased some companies' market power both over their labour inputs (through monopsony effects) and product outputs (through monopoly effects). This could show up in both a falling labour and a rising profit share, with potential macroeconomic implications for activity, costs and prices (Autor et al (2017), Barkai (2017)). 1 As Blanchard (2008) said, "How markups move, in response to what, and why, is however nearly terra incognita for macro." 2 Some notable papers that discuss the impact of product market developments on the macro-economy include Cacciatore and Fiori (2016) and Eggertsson, Ferrero and Raffo (2014). 3 Unlike many other advanced economies, it is worth noting that the UK labour share has not been on a downward trend.
SSRN Electronic Journal
In this paper we explore the link between monetary policy and market power. We start by establish... more In this paper we explore the link between monetary policy and market power. We start by establishing several facts on market power in UK markets using micro data. First, while no clear trend emerges for market concentration, market power measured by markups estimated at the firm level have clearly increased in recent years, with the rise being reasonably broad-based across sectors. Second, we show that the increase is heavily concentrated in the upper tail of the distribution-companies whose markups are in, say, the top quartile. Third, internationally-oriented firms are the driving force behind the rise in markups. Fourth, following Díez et al (2018), we find some reduced-form evidence of a non-monotonic relation between markups and investment at the firm level, with high levels of markups being associated with lower investment. Having established these facts, we show that the Phillips curve becomes steeper in the textbook New Keynesian model when firms tend to have more market power, reducing the sacrifice ratio for monetary policy. As inflation becomes less costly in an economy with high market power, however, the optimal targeting rule for monetary policy also changes. A rise in both the trend and volatility of markups may lead to a significant rise in inflation variability. But a secular rise in markups by itself improves monetary policy's ability to stabilise inflation without inducing large movements in output.
Bank of England Quarterly Bulletin, Jun 16, 2014
In his recent book, Raghu Rajan blames neglect of the Third Pillar of societycommunityrelative to... more In his recent book, Raghu Rajan blames neglect of the Third Pillar of societycommunityrelative to the market and the state (the first two pillars) for rising societal disconnection and mistrust. 3 Rajan is right. Economic policymakers, including central banks, have a pivotal role to play in resurrecting that Third Pillar, in making economic policy local, to better support our economies and societies. Here is how. Mapping the Economy Let me begin with some simple mapping of the economy. The most widely-used metric of economic success is Gross Domestic Product (GDP). 4 In simple terms, this measures how much the average person has available to spend on the good things in life. If asked, most people would say this is a decent, if partial, proxy for their overall economic health, even if they express bafflement at the concept of GDP. Aggregate GDP is far from being the only possible proxy for economic health. The lived experience of most people depends on more than their income. A rich strand of literature has developed alternative measures of people's well-being. As well as economic and financial health, these measures include physical and mental health, their families, friends and communities. 5 This work tells us that people's sense of well-being, if not their GDP, is shaped by local factors, underpinned by the Third Pillar. Another reason why aggregate GDP may not chime with most people's lived experience is because, by definition, most people are not "average". Economists use the idea of the average or representative agent as a convenient shortcut. But that agent is a fiction. People's lived experiences often differ very materially, even within a single country or regionspatially, socially and financially. For most people's everyday lives and everyday decisions, all economics is local. These imperfections in GDP are well-understood. They certainly do not fatally undermine its usefulness as a means of keeping economic score. They do, however, suggest it can usefully be complemented by looking at the economy through different lenses. One of those different lenses comes from mapping the economy bottom-up, rather than top-down, aggregating microscopic experiences into a macroscopic view. In medicine, we use a variety of different tools, at different resolutions, to diagnose problems and when prescribing solutions: thermometers, blood pressure monitors, X-rays, CT scans, ultrasound and blood tests. Rarely does one of these measures provide all of the diagnostic answers. Using them in combination can, however, help reach robust clinical conclusions. And that "micro-to-macro" approach is commonplace when understanding other complex adaptive systems like the body, natural, physical and social. 3 Rajan (2019). 4 Coyle (2014).
The UK economy is closely integrated into the wider global economy. These ties mean that global d... more The UK economy is closely integrated into the wider global economy. These ties mean that global developments affect the economic fortunes of the United Kingdom. This article presents model-based estimates which suggest that world shocks have driven around two thirds of the weakness in UK output since 2007. Trade linkages are an important channel for the transmission of world shocks to the UK economy. But financial linkages and spillovers through uncertainty are significant, too — and together are likely to account for the majority of the impact of world shocks on the United Kingdom since 2007.
The topic for this panel is the link between developments in product markets and monetary policy.... more The topic for this panel is the link between developments in product markets and monetary policy. It is a great one. A lot of attention has been paid by central bankers over recent years to the relationship between labour markets and monetary policy (for example, Yellen (2014) and Constâncio (2017)). And rightly so. The relationship between monetary policy and product markets has, by comparison, been the road less travelled. 1,2 Labour markets have been subject to big structural shifts over recent years, including the secular fall in the degree of worker unionisation in a number of industries (for example, Schnabel (2013)), the emergence of the so-called "gig economy" (for example, Taylor (2017) and Katz and Krueger (2017)) and secular rise in the degree of globalisation and automation in the workplace (for example, Brynjolfsson and McAfee (2014) and Acemoglu and Restrepo (2018)). Each of these shifts has led to a change in employment patterns and tenures and in workers' bargaining power. These structural shifts have been used to help explain the secular fall in labour's share of national income and the recent weakness of wage growth across a number of advanced economies (for example, Dao et al (2017) and Abdih and Danninger (2017)). 3 They have also been used to justify potential shifts in the position and/or the slope of the Phillips curve (for example, Blanchard (2016) and Kuttner and Robinson (2010)). Each of these potentially has a bearing on the setting of monetary policy. Yet, over the same period, structural shifts in the product market have been no less profound. They include the emergence of highly-integrated global supply chains, increasing the degree of specialisation of product markets (Baldwin (2016)); the blossoming of companies benefitting from global network economies of scale and scope, who acquire "superstar" status (Autor et al (2017)); and the rapid emergence of e-commerce and price-comparison technology (Cavallo (2017)). The associated shifts in market power, too, might plausibly have altered some of the key macroeconomic relationships in the economy (De Loecker and Eeckhout (2017)). They may have influenced the pricing and provision of goods and services in the economy and hence the Phillips curve. And they may have influenced the amount of investment and innovation undertaken by firms and hence the aggregate demand curve (Aghion et al (2005)). They, too, might thus have a bearing on the setting of monetary policy. These structural shifts in product and labour markets may, in some cases, have had common cause. For example, network economies of scale and scope could potentially have increased some companies' market power both over their labour inputs (through monopsony effects) and product outputs (through monopoly effects). This could show up in both a falling labour and a rising profit share, with potential macroeconomic implications for activity, costs and prices (Autor et al (2017), Barkai (2017)). 1 As Blanchard (2008) said, "How markups move, in response to what, and why, is however nearly terra incognita for macro." 2 Some notable papers that discuss the impact of product market developments on the macro-economy include Cacciatore and Fiori (2016) and Eggertsson, Ferrero and Raffo (2014). 3 Unlike many other advanced economies, it is worth noting that the UK labour share has not been on a downward trend.
SSRN Electronic Journal
In this paper we explore the link between monetary policy and market power. We start by establish... more In this paper we explore the link between monetary policy and market power. We start by establishing several facts on market power in UK markets using micro data. First, while no clear trend emerges for market concentration, market power measured by markups estimated at the firm level have clearly increased in recent years, with the rise being reasonably broad-based across sectors. Second, we show that the increase is heavily concentrated in the upper tail of the distribution-companies whose markups are in, say, the top quartile. Third, internationally-oriented firms are the driving force behind the rise in markups. Fourth, following Díez et al (2018), we find some reduced-form evidence of a non-monotonic relation between markups and investment at the firm level, with high levels of markups being associated with lower investment. Having established these facts, we show that the Phillips curve becomes steeper in the textbook New Keynesian model when firms tend to have more market power, reducing the sacrifice ratio for monetary policy. As inflation becomes less costly in an economy with high market power, however, the optimal targeting rule for monetary policy also changes. A rise in both the trend and volatility of markups may lead to a significant rise in inflation variability. But a secular rise in markups by itself improves monetary policy's ability to stabilise inflation without inducing large movements in output.
Bank of England Quarterly Bulletin, Jun 16, 2014