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Big Banks and Macroeconomic Outcomes: Theory and Cross-Country Evidence of Granularity

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  • Franziska Bremus
  • Claudia M. Buch
  • Katheryn N. Russ
  • Monika Schnitzer

Abstract

Does the mere presence of big banks affect macroeconomic outcomes? In this paper, we develop a theory of granularity (Gabaix, 2011) for the banking sector, introducing Bertrand competition and heterogeneous banks charging variable markups. Using this framework, we show conditions under which idiosyncratic shocks to bank lending can generate aggregate fluctuations in the credit supply when the banking sector is highly concentrated. We empirically assess the relevance of these granular effects in banking using a linked micro-macro dataset of more than 80 countries for the years 1995-2009. The banking sector for many countries is indeed granular, as the right tail of the bank size distribution follows a power law. We then demonstrate granular effects in the banking sector on macroeconomic outcomes. The presence of big banks measured by high market concentration is associated with a positive and significant relationship between bank-level credit growth and aggregate growth of credit or gross domestic product.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.434052.de/dp1348.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1348.

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Length: 40 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwwpp:dp1348

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Keywords: Granularity; concentration; bank competition; macroeconomic outcomes; bank markups;

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Citations

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Cited by:
  1. F. Bremus & Claudia M. Buch, 2013. "Granularity in Banking and Growth: Does Financial Openness Matter?," IWH Discussion Papers 14, Halle Institute for Economic Research.
  2. Mary Amiti & David E. Weinstein, 2013. "How Much do Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data," NBER Working Papers 18890, National Bureau of Economic Research, Inc.
  3. Thomas Lux, 2014. "Emergence of a Core-Periphery Structure in a Simple Dynamic Model of the Interbank Market," Kiel Working Papers 1917, Kiel Institute for the World Economy.
  4. Franziska Bremus, 2013. "Cross-Border Banking, Bank Market Structures and Market Power: Theory and Cross-Country Evidence," Discussion Papers of DIW Berlin 1344, DIW Berlin, German Institute for Economic Research.

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