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The size distribution of the banking sector and the effects of monetary policy

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  • Ghossoub, Edgar A.
  • Reed, Robert R.

Abstract

In recent years, the industrial organization of the banking system has received a large amount of attention. In particular, it is generally viewed that the size distribution of the banking sector has changed where it is dominated by a small number of large institutions. In this paper, we develop a model of imperfectly competitive banks that differ in terms of the size of their deposit base. Such differences are important for aggregate credit market activity and the effects of monetary policy. Notably, we explain how the optimal size distribution of the banking system involves trade-offs from distortions in credit markets due to imperfect competition across banking markets. Second, the effects of monetary policy on credit market activity are weaker in an economy dominated by a small number of large banks. Empirical analysis examining the role of concentration among the current members of the European Monetary Union is consistent with the predictions of the model.

Suggested Citation

  • Ghossoub, Edgar A. & Reed, Robert R., 2015. "The size distribution of the banking sector and the effects of monetary policy," European Economic Review, Elsevier, vol. 75(C), pages 156-176.
  • Handle: RePEc:eee:eecrev:v:75:y:2015:i:c:p:156-176
    DOI: 10.1016/j.euroecorev.2015.01.002
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    References listed on IDEAS

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    Cited by:

    1. Fernholz, Ricardo T. & Koch, Christoffer, 2016. "Why are big banks getting bigger?," Working Papers 1604, Federal Reserve Bank of Dallas.
    2. repec:bla:ecnote:v:46:y:2017:i:3:p:527-554 is not listed on IDEAS
    3. Jose E. Gomez-Gonzalez & Ali M. Kutan & Jair N. Ojeda-Joya & María Camila Ortiz, 2016. "The Bank Lending Channel of Monetary Policy: Does the Financial Structure of Banks Matter," Borradores de Economia 953, Banco de la Republica de Colombia.

    More about this item

    Keywords

    Imperfect competition; Banking; Monetary policy; Size distribution;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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