IDEAS home Printed from https://ideas.repec.org/a/eee/inecon/v80y2010i2p292-301.html
   My bibliography  Save this article

Market power in banking, countercyclical margins and the international transmission of business cycles

Author

Listed:
  • Olivero, María Pía

Abstract

By introducing an imperfectly competitive banking sector into a standard two-country, two-good RBC model with complete asset markets, we study the international transmission of aggregate TFP shocks in an environment with noncompetitive financial intermediation. In this model, price-cost margins in a global loan market are endogenous and countercyclical. As a result, a positive TFP shock in one country spills over to another through a reduction in the global cost of both credit and externally financed investment. The quantitative analysis shows that countercyclical margins on loans play a key role in bringing the predictions of the theory closer to the observed cross-country cyclical co-movements of consumption, employment, investment and output. Recessions are deeper when the cost of credit rises during these economic downturns. Thus, a financial accelerator arises in our framework, unveiling the increased importance of stabilization policies in economies where margins in credit markets are countercyclical.

Suggested Citation

  • Olivero, María Pía, 2010. "Market power in banking, countercyclical margins and the international transmission of business cycles," Journal of International Economics, Elsevier, vol. 80(2), pages 292-301, March.
  • Handle: RePEc:eee:inecon:v:80:y:2010:i:2:p:292-301
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0022-1996(09)00097-X
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Molyneux, Phil & Lloyd-Williams, D. M. & Thornton, John, 1994. "Competitive conditions in european banking," Journal of Banking & Finance, Elsevier, vol. 18(3), pages 445-459, May.
    2. Barron, John M & Valev, Neven T, 2000. "International Lending by U.S. Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 357-381, August.
    3. Stijn Claessens & Luc Laeven, 2004. "What drives bank competition? Some international evidence," Proceedings, Federal Reserve Bank of Cleveland, pages 563-592.
    4. Michael J. Dueker & Daniel L. Thornton, 1997. "Do bank loan rates exhibit a countercyclical mark-up?," Working Papers 1997-004, Federal Reserve Bank of St. Louis.
    5. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-775, August.
    6. Berger, Allen N & Hannan, Timothy H, 1989. "The Price-Concentration Relationship in Banking," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 291-299, May.
    7. Baxter, Marianne & Kouparitsas, Michael A., 2005. "Determinants of business cycle comovement: a robust analysis," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 113-157, January.
    8. Schmitt-Grohe, Stephanie, 1998. "The international transmission of economic fluctuations:: Effects of U.S. business cycles on the Canadian economy," Journal of International Economics, Elsevier, vol. 44(2), pages 257-287, April.
    9. Hondroyiannis, George & Lolos, Sarantis & Papapetrou, Evangelia, 1999. "Assessing competitive conditions in the Greek banking system," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(4), pages 377-391, November.
    10. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 601-627, April.
    11. den Haan, Wouter J., 2000. "The comovement between output and prices," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 3-30, August.
    12. David Neumark & Steven A. Sharpe, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 657-680.
    13. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-185, March.
    14. Alli Nathan & Edwin H. Neave, 1989. "Competition and Contestability in Canada's Financial System: Empirical Results," Canadian Journal of Economics, Canadian Economics Association, vol. 22(3), pages 576-594, August.
    15. Bikker, Jacob A. & Haaf, Katharina, 2002. "Competition, concentration and their relationship: An empirical analysis of the banking industry," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2191-2214, November.
    16. Ubide, Angel J., 1999. "International Transmission of Shocks in a Business-Cycle Model Under Imperfect Competition," Macroeconomic Dynamics, Cambridge University Press, vol. 3(3), pages 341-367, September.
    17. Federico S. Mandelman, 2006. "Business cycles: a role for imperfect competition in the banking system," FRB Atlanta Working Paper 2006-21, Federal Reserve Bank of Atlanta.
    18. 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.
    19. De Bandt, Olivier & Davis, E. Philip, 2000. "Competition, contestability and market structure in European banking sectors on the eve of EMU," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 1045-1066, June.
    20. Matthews, Kent & Murinde, Victor & Zhao, Tianshu, 2007. "Competitive conditions among the major British banks," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2025-2042, July.
    21. Jonathan Heathcote & Fabrizio Perri, 2003. "Why Has the U.S. Economy Become Less Correlated with the Rest of the World?," American Economic Review, American Economic Association, vol. 93(2), pages 63-69, May.
    22. Cook, David, 2002. "Market entry and international propagation of business cycles," Journal of International Economics, Elsevier, vol. 56(1), pages 155-175, January.
    23. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    24. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
    25. James V. Houpt, 1999. "International activities of U.S. banks and in U.S. banking markets," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), vol. 85(Sep), pages 599-616, September.
    26. Boileau, Martin, 1996. "Growth and the International Transmission of Business Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 737-756, November.
    27. J.A. Bikker & J.M. Groeneveld, 1998. "Competition and Concentration in the EU Banking Industry," Research Series Supervision (discontinued) 8, Netherlands Central Bank, Directorate Supervision.
    28. Schargrodsky, Ernesto & Sturzenegger, Federico, 2000. "Banking regulation and competition with product differentiation," Journal of Development Economics, Elsevier, vol. 63(1), pages 85-111, October.
    29. Rotemberg, Julio J., 1996. "Prices, output, and hours: An empirical analysis based on a sticky price model," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 505-533, June.
    30. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-945, September.
    31. Kidwell, David S & Trzcinka, Charles A, 1979. "The Risk Structure of Interest Rates and the Penn-Central Crisis," Journal of Finance, American Finance Association, vol. 34(3), pages 751-760, June.
    32. Simon Gilchrist, 2004. "Financial Markets and Financial Leverage in a Two-Country World Economy," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Antonio Ahumada & J. Rodrigo Fuentes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking Market Structure and Monetary Policy, edition 1, volume 7, chapter 2, pages 027-058, Central Bank of Chile.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ronald Kumar & Arvind Patel, 2014. "Exploring competitiveness in banking sector of a small island economy: a study of Fiji," Quality & Quantity: International Journal of Methodology, Springer, vol. 48(6), pages 3169-3183, November.
    2. Andrieş, Alin Marius & Căpraru, Bogdan, 2014. "The nexus between competition and efficiency: The European banking industries experience," International Business Review, Elsevier, vol. 23(3), pages 566-579.
    3. Turk-Ariss, Rima, 2009. "Competitive behavior in Middle East and North Africa banking systems," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 693-710, May.
    4. Coccorese, Paolo, 2009. "Market power in local banking monopolies," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1196-1210, July.
    5. Abdul Majid, Muhamed Zulkhibri & Sufian, Fadzlan, 2007. "Market Structure and Competition in Emerging Market: Evidence from Malaysian Islamic Banking Industry," MPRA Paper 12126, University Library of Munich, Germany, revised 01 Jul 2007.
    6. firano, zakaria & filali Adib, fatine, 2018. "Competition and financial stability: a new paradigm," MPRA Paper 95167, University Library of Munich, Germany.
    7. Coccorese, Paolo & Pellecchia, Alfonso, 2013. "Multimarket contact, competition and pricing in banking," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 187-214.
    8. Tai-Hsin Huang & Nan-Hung Liu, 2014. "Bank competition in transition countries: Are those markets really in equilibrium?," Empirical Economics, Springer, vol. 47(4), pages 1283-1316, December.
    9. Tabak, Benjamin M. & Fazio, Dimas M. & Cajueiro, Daniel O., 2012. "The relationship between banking market competition and risk-taking: Do size and capitalization matter?," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3366-3381.
    10. Anzoategui Diego & Martinez Peria Maria S. & Rocha Roberto R, 2010. "Bank Competition in the Middle East and Northern Africa Region," Review of Middle East Economics and Finance, De Gruyter, vol. 6(2), pages 26-48, November.
    11. Chen, Sheng-Hung & Liao, Chien-Chang, 2011. "Are foreign banks more profitable than domestic banks? Home- and host-country effects of banking market structure, governance, and supervision," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 819-839, April.
    12. Natasa Koutsomanoli & Christos Staikouras, 2004. "Competition and Concentration," Money Macro and Finance (MMF) Research Group Conference 2004 26, Money Macro and Finance Research Group.
    13. Manthos D. Delis & K. Christos Staikouras & Panagiotis T. Varlagas, 2008. "On the Measurement of Market Power in the Banking Industry," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(7‐8), pages 1023-1047, September.
    14. Carbó, Santiago & Humphrey, David & Maudos, Joaquín & Molyneux, Philip, 2009. "Cross-country comparisons of competition and pricing power in European banking," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 115-134, February.
    15. Park, Kang H., 2016. "How Competitive and Stable is the Commercial Banking Industry in China after Bank Reforms?," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 38(1), pages 53-70.
    16. Shin, Dong Jin & Kim, Brian H.S., 2013. "Bank consolidation and competitiveness: Empirical evidence from the Korean banking industry," Journal of Asian Economics, Elsevier, vol. 24(C), pages 41-50.
    17. Anzoategui, Diego & Pería, María Soledad Martínez & Melecky, Martin, 2012. "Bank competition in Russia: An examination at different levels of aggregation," Emerging Markets Review, Elsevier, vol. 13(1), pages 42-57.
    18. Jacob A. Bikker & Sherrill Shaffer & Laura Spierdijk, 2012. "Assessing Competition with the Panzar-Rosse Model: The Role of Scale, Costs, and Equilibrium," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1025-1044, November.
    19. Carlos Pestana Barros & Zorro Mendes, 2016. "Assessing the competition in Angola’s banking industry," Applied Economics, Taylor & Francis Journals, vol. 48(30), pages 2785-2791, June.
    20. Al-Muharrami, Saeed & Matthews, Kent & Khabari, Yusuf, 2006. "Market structure and competitive conditions in the Arab GCC banking system," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3487-3501, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:inecon:v:80:y:2010:i:2:p:292-301. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/inca/505552 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505552 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.