A discussion of competition and “superstar” firms at an exclusive economic policy conference in Jackson Hole, Wyoming, threw up a spirited defense of global trade, while central bankers were also warned of the low level of trust they have among the public.
“We should think twice about undermining the discipline of openness” and the competition that is created by global trade, Bank for International Settlements general manager Agustin Carstens said during Saturday’s session of the annual meeting hosted by the Federal Reserve Bank of Kansas City in Grand Teton National Park.
Delegates debated evidence that economic concentration — best illustrated by companies like Amazon.com Inc, Alphabet Inc’s Google, and Apple Inc — is eroding competition and hurting workers, consumers and overall economic growth.
Part of the fallout of superstar firms is the resentment of economic elites among workers not employed by dynamic, growing companies, said Raghuram Rajan, a University of Chicago professor and former governor of the Reserve Bank of India.
Central bankers are the “quintessential elite,” he said. “They talk about global effects and don’t talk about local mainstream effects. They’re over-educated and talk in a language no one else can understand.”
That remoteness, combined with their role in the rescue of big banks in the global financial crisis, has led to a “tremendous loss of trust” in central bankers, he said.
There is also the so-called “Amazon effect” that might be relevant for central bankers, according to a paper presented by Harvard Business School economist Alberto Cavallo.
Cavallo’s main finding was that competition from Amazon has led to a greater frequency of price changes at more traditional retailers like Walmart Inc, and also to more uniformity in pricing of the same items across different locations.
The shift has led to a greater influence of movements in the US dollar exchange rate and gas prices on retail prices, he found.
“The implication is that retail prices are becoming less ‘insulated’ from these common nationwide shocks,” Cavallo wrote. “Fuel prices, exchange-rate fluctuations, or any other force affecting costs that may enter the pricing algorithms used by these firms are more likely to have a faster and larger impact on retail prices than in the past.”
The Cavallo study also showed that from 2008 to last year, as online purchases accounted for an ever-growing share of total retail sales, the average duration of prices of goods sold at large US retailers like Walmart fell from about 6.5 months to about 3.7 months.
The implications have subtle significance for monetary policy because so-called “sticky prices” — the notion that sellers are not able to change prices right away in response to changes in supply and demand — is precisely what gives interest rates power in mainstream models to have any effect on the economy at all.
In those models, if prices adjust instantaneously in response to shocks, then there is no role for central bankers to guide supply and demand back into equilibrium.
“Labor costs, limited information and even ‘decision costs’ [related to inattention and the limited capacity to process data] will tend to disappear as more retailers use algorithms to make pricing decisions,” Cavallo wrote.
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