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Endogenous market structures in the credit market and Ricardian equivalence

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  • Etro, Federico

Abstract

We analyze the impact of imperfect competition in banking on fiscal policy in a dynamic model. In an exchange two-period economy the impact of deficit spending is to reduce private consumption and increase the spread between deposit and lending rates. The reason is that a tax cut forces consumers to save more and makes their supply of savings more rigid, which softens competition between banks leading to lower rates on deposits and a more than proportional increase in savings. In a closed production economy this reduces the equilibrium interest rate on borrowers, which promotes private investment.

Suggested Citation

  • Etro, Federico, 2016. "Endogenous market structures in the credit market and Ricardian equivalence," Economics Letters, Elsevier, vol. 140(C), pages 14-18.
    • Handle: RePEc:eee:ecolet:v:140:y:2016:i:c:p:14-18
    DOI: 10.1016/j.econlet.2015.11.042
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    References listed on IDEAS

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    4. Kollmann, Robert & Ratto, Marco & Roeger, Werner & in′t Veld, Jan, 2013. "Fiscal policy, banks and the financial crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 37(2), pages 387-403.
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    Cited by:

    1. Federico Etro, 2018. "Macroeconomics with Endogenous Markups and Optimal Taxation," Southern Economic Journal, John Wiley & Sons, vol. 85(2), pages 378-406, October.
    2. Dia, Enzo & VanHoose, David, 2018. "Fixed costs and capital regulation: Impacts on the structure of banking markets and aggregate loan quality," Journal of Financial Stability, Elsevier, vol. 36(C), pages 53-65.

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    More about this item

    Keywords

    Ricardian equivalence; Credit market; Endogenous entry; Optimal fiscal policy;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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