In a fascinating new blog post that was published yesterday three IMF authors suggested that:
Some central banks are currently debating whether to tighten monetary policy to fight inflationary pressures, after having eased decisively in response to the COVID-19 shock. In making such decisions, central bankers have to consider how much businesses and consumers will respond. The structure of the financial system and the future expectations of consumers and businesses are key drivers of how effective monetary policy actions will be. Yet there's another, overlooked, driver: corporate market power.
New IMF staff research has found ever larger and more powerful companies are making monetary policy a less potent tool for managing the economy in advanced economies, all else equal.
The argument is that, in effect, monetary policy is premised on the idea that all companies are small enough to be subject to market pressures, and that interest rate policies can impose changes on markets that will, because of those market pressures, be transmitted into both corporate and personal behaviour.
However, the assumptions does not hold true, they suggest, when there are companies of exceptional size. As they note:
Our study finds that firms with greater market power respond less to monetary policy actions, possibly because of their bigger profits. Larger profits make these firms less sensitive to changes in external financing conditions, such as those triggered by central banks' decisions. For example, as of March 2021, Apple had over $200 billion in cash and investment in marketable securities, while Alphabet had over $150 billion. Firms with such large cash cushions can decide on investment and other projects without having to worry about how easily they could tap other funding sources.
They added:
Specifically, using data for the United States and a panel of 14 advanced economies, we find that high-markup firms respond a lot less to a monetary policy shock–an unexpected change in the policy rate–than the average firm in the economy. For example, in the US, a 100 basis point increase in the policy rate causes a low-markup firm to cut sales by about 2 percent after four quarters, while a high-markup firm barely reduces its sales. Results for the panel of advanced countries are qualitatively similar.
Note the comment on profits: they suggest that these companies not only control their own supplies of capital, they also note that they appear able to control their own profit margins, which have been rising significantly over time. This is monopoly power in play.
A while ago I suggested to colleagues that when we were looking at large corporations we should drop the idea that they are microeconomic entities and instead assume that they might be macroeconomic entities instead, since they seem to be in charge of their own economic policies. This IMF finding supports that view. These entities are not subject to market constraints. They are not even in the market, as such. They do, instead, run their own economies that co-exist with those of countries but are at least in part removed from them.
And that is why campaigns to tackle monopolist abuse are now of special significance.
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Regulatory capture even?
This is just another straw in the wind, but it is a very welcome one. I have long been arguing that the governance of capitalism is the key challenge. Democracies have been hollowed out, corporate capitalists and high net worth individuals (and often cabals of these) have suborned governing politicians and policy-makers, have rigged and subverted markets, emaculated the governance of capitalism, economic regulation and fiscal policy, subverted monetary policy, undermined the rule of law by interference in the legislative process and totally compromised the media.
The Biden’s administration determined pivot away from this mis-named neoliberalism is significant, but it will be a hard battle as the forces of darkness and resistance are formidable. EU governments are a long way behind the curve. And the less said about our mendacious and incompetent government the better.
The article is right to point out that Global corporations are increasingly immune to the effects of national interest rate policy. This is not just because they sit on huge cash piles to fund their own investments, but also because they operate Globally, so can freely borrow in any currency that may be most beneficial. Interest rate changes are only likely to influence them in so far as they set the projections for future consumer demand in each country. And as we head to a World in 2050 with 5 billion consumers in Asia, while EU remains at 500 million and North America 400 million, local interest rates in UK or USA will only be of marginal significance to them.
Furthermore, interest rates can only work as a means to control inflation in a closed ( national ) system. If supply capacity is determined by Global factors then, reducing or increasing domestic demand through interest rates can have almost no effect on the price of imports. The criminal failure of economists to understand this even lay behind the 2007/08 financial crisis. Central banks kept interest rates far too low in the run up to the financial crisis, because the huge addition of China to Global capacity prevented inflation rising above target. In reality domestic demand in USA and Europe was vastly overheating in a credit-fuelled bubble, but no-one seemed to care while they were still making money from the boom.
In a World where the real supply and demand balance is determined by Global factors, then managing domestic demand through national interest rates can no longer control inflation. All of this points to the need for a more formalised Global Economic Partnership in the future. Populists may shout for policy independence as loud as they want, but today’s reality is one of Global supply chains in which only co-ordinated international policy will produce effective results.
I note that the cash held by what I may term from your examples, the ‘monetary indifference’ businesses, was given in US$. Are the cash holdings actually in US$? The US$ is critical, but if it is, can these businesses really be independent? How would they become independent of currency? If the US$ is presumed not to be critical, then presumably the businesses would hold a basket of easily transferable currencies which would be genuinely independent of any single currency. Will that really work?
I am not sure how genuine the independence really is, or could be; but I acknowledge that neoliberalism attempts to create an economic world that is somehow detached from money (work that one out; it is an old flaw in both classical and neoliberal economic thinking): without understanding the consequences of what they do; because neoliberalsim has never understood the nature of money, or even attempted to understand its elusive nature.
I strongly suspect that they do hold a basket of currencies: hedging is part of their game
They may play the game, but are they independent?
No one is independent
“These entities are not subject to market constraints. They are not even in the market, as such. They do, instead, run their own economies that co-exist with those of countries but are at least in part removed from them.”
I was not sure what conclusions you were drawing from this.
That they are macroeconomic agents outside microeconomic influences