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Market power in banking, countercyclical margins and the international transmission of business cycles

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  • Olivero, María Pía

Abstract

By introducing an imperfectly competitive banking sector into a standard two-country, two-good RBC model with complete asset markets, we study the international transmission of aggregate TFP shocks in an environment with noncompetitive financial intermediation. In this model, price-cost margins in a global loan market are endogenous and countercyclical. As a result, a positive TFP shock in one country spills over to another through a reduction in the global cost of both credit and externally financed investment. The quantitative analysis shows that countercyclical margins on loans play a key role in bringing the predictions of the theory closer to the observed cross-country cyclical co-movements of consumption, employment, investment and output. Recessions are deeper when the cost of credit rises during these economic downturns. Thus, a financial accelerator arises in our framework, unveiling the increased importance of stabilization policies in economies where margins in credit markets are countercyclical.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 80 (2010)
Issue (Month): 2 (March)
Pages: 292-301

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Handle: RePEc:eee:inecon:v:80:y:2010:i:2:p:292-301

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: International RBC Imperfect competition;

References

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