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Banking Competition and Effectiveness of Monetary Policy Transmission: A Theoretical and Empirical Assessment on Indonesia case

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  • Elis Deriantino

Abstract

This study compares banking behavior towards monetary policy rate changes in two different markets, i.e. a market in absence of collusive (a more competitive market) and a collusive market (a less competitive market). It expands Monti Klein model of monopolistic bank by incorporating Capital Adequacy Requirement (CAR) ratio as a measure to promote resilience of banking system. Empirical assessment by utilizing Lerner index as a competition measure on Indonesia banking industry over the periode of 2001-2012 supports theoretical finding in loan market, where a more competitive bank is significantly more responsive in adjusting its loan rates to changes in monetary policy rate, implying bank competition may enhance effectiveness of monetary policy transmission in loan market. Moreover, we find that imposition of macroprudential measure of CAR does not significantly alter the transmission mechanism in both deposits and loan markets, implying there is no trade off between promoting a more resilient banking system and effectiveness of monetary policy transmission to banking industry.

Suggested Citation

  • Elis Deriantino, 2013. "Banking Competition and Effectiveness of Monetary Policy Transmission: A Theoretical and Empirical Assessment on Indonesia case," International Journal of Economic Sciences, Prague University of Economics and Business, vol. 2013(3).
    • Handle: RePEc:prg:jnljes:v:2013:y:2013:i:3:id:5
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    References listed on IDEAS

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    1. Gabriel Jimenez & Jose A. Lopez & Jesus Saurina, 2007. "How does competition impact bank risk-taking?," Working Paper Series 2007-23, Federal Reserve Bank of San Francisco.
    2. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, December.
    3. Klaus Schaeck & Martin Cihak & Simon Wolfe, 2009. "Are Competitive Banking Systems More Stable?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 711-734, June.
    4. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2003. "Bank Concentration and Crises," NBER Working Papers 9921, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Chileshe, Patrick Mumbi & Akanbi, Olusegun Ayodele, 2016. "Asymmetry of the Interest Rate Pass-through in Zambia," MPRA Paper 82673, University Library of Munich, Germany.

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