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Credit channel and industrial firms' market power

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  • Marco Mazzoli

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    Abstract

    The theoretical model presented here describes the interactions between a concentrated industrial sector and a perfectly competitive financial system where industrial firms can issue bonds or borrow from money from the banks in order to finance their investments. It is shown that an exogenous modification in the degree of concentration in the industrial sector does not only affects the equilibrium level of investments and the price of the final good, but also the transmission mechanism of the monetary policy. This paper also presents a first simplified framework to study the interactions between market power of industrial firms on the credit market and endogeneity of the composition of their external finance (in this context, bank credit and bonds). For this reason one of the main assumptions of the model is the existence of the "credit channel". The endogeneity of the composition of industrial firms' external finance also allows to formalise (although in a very simplified one-period context) a situation of simultaneity between financial and investment decisions for the firms.

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    Bibliographic Info

    Paper provided by Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica in its series Heterogeneity and monetary policy with number 0007.

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    Length: pages 16
    Date of creation: Jul 2000
    Date of revision:
    Handle: RePEc:mod:modena:0007

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    Web page: http://www.economia.unimore.it
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    Keywords: credit; money multipliers; industrial organization and macroeconomics.;

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    1. Benjamin M. Friedman & Kenneth N. Kuttner, 1993. "Economic activity and the short-term credit markets: an analysis of prices and quantities," Working Paper Series, Macroeconomic Issues 93-17, Federal Reserve Bank of Chicago.
    2. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937.
    3. Mazzoli,Marco, 1998. "Credit, Investments and the Macroeconomy," Cambridge Books, Cambridge University Press, number 9780521584111.
    4. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
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