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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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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
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    3. 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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    5. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    6. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and Banking in a DSGE Model of the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 107-141, September.
    7. Etro, Federico & Rossi, Lorenza, 2015. "New-Keynesian Phillips curve with Bertrand competition and endogenous entry," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 318-340.
    8. Federico Etro & Andrea Colciago, 2010. "Endogenous Market Structures and the Business Cycle," Economic Journal, Royal Economic Society, vol. 120(549), pages 1201-1233, December.
    9. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-190, March.
    10. Vivien Lewis & Roland Winkler, 2015. "Product Diversity, Demand Structures, And Optimal Taxation," Economic Inquiry, Western Economic Association International, vol. 53(2), pages 979-1003, April.
    11. Carla La Croce & Lorenza Rossi, 2014. "Endogenous Entry, Banking, and Business Cycle," DEM Working Papers Series 072, University of Pavia, Department of Economics and Management.
    12. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, November.
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    1. repec:eee:finsta:v:36:y:2018:i:c:p:53-65 is not listed on IDEAS

    More about this item

    Keywords

    Ricardian equivalence; Credit market; Endogenous entry; Optimal fiscal policy;

    JEL classification:

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

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