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A macroeconomic theory of banking oligopoly

Author

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  • Dong, Mei
  • Huangfu, Stella
  • Sun, Hongfei
  • Zhou, Chenggang

Abstract

We study the behavior and macroeconomic impact of oligopolistic banks in a tractable environment with micro-foundations for money and banking. In our model, large banks interact strategically as they compete against each other to make loans. Banks face potential liquidity issues as they try to secure deposits as a source of funds. We find that it is welfare-maximizing to have the banking sector as oligopolistic, i.e., to have a small number of large banks. In addition, inflation stimulates bank entry but always reduces welfare.

Suggested Citation

  • Dong, Mei & Huangfu, Stella & Sun, Hongfei & Zhou, Chenggang, 2021. "A macroeconomic theory of banking oligopoly," European Economic Review, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:eecrev:v:138:y:2021:i:c:s0014292121001896
    DOI: 10.1016/j.euroecorev.2021.103864
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    2. Yerushalmi, Erez & Paladini, Stefania, 2023. "Blockchain in Financial Intermediation and Beyond: What are the Main Barriers for Widespread Adoption?," CAFE Working Papers 22, Centre for Accountancy, Finance and Economics (CAFE), Birmingham City Business School, Birmingham City University.
    3. Sholevar, Maryam & Harris, Laurence, 2019. "Mind the gap: A discussion paper on Financial Literacy, Financial behaviour and Financial Education : Is there any Gender Gap?," OSF Preprints b7zd6, Center for Open Science.
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    5. Altermatt, Lukas & Wang, Zijian, 2021. "Oligopoly Banking, Risky Investment, and Monetary Policy," Economics Discussion Papers 30728, University of Essex, Department of Economics.
    6. Schneider, Andreas, 2020. "Credit cooperatives: Market structure, competition, and conduct. Exploring the case of Paraguay," MPRA Paper 102309, University Library of Munich, Germany.

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    More about this item

    Keywords

    Banking; Oligopoly; Liquidity; Market frictions;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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