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Bank competition, real investments, and welfare

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  • Oz Shy

    ()

  • Rune Stenbacka

    () (Hanken School of Economics)

Abstract

We construct an overlapping generations growth model, where young consumers choose how to allocate resources among real investment (deposits), acquisition of bank ownership, and young-age consumption. At old age, consumers sell bank ownership and collect their bank deposits to support consumption. The model shows that an increase in banks’ market power stimulates bank profit and bank value, thereby raising the resources required for young consumers to acquire bank ownership. This causes a crowding-out effect on real investment, the magnitude of which is amplified with higher endowment growth rate and real investment return. Finally, we conduct a welfare analysis of the investment crowding-out effect.

Suggested Citation

  • Oz Shy & Rune Stenbacka, 2019. "Bank competition, real investments, and welfare," Journal of Economics, Springer, vol. 127(1), pages 73-90, June.
  • Handle: RePEc:kap:jeczfn:v:127:y:2019:i:1:d:10.1007_s00712-018-0634-0
    DOI: 10.1007/s00712-018-0634-0
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    References listed on IDEAS

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    Cited by:

    1. Shy, Oz & Stenbacka, Rune, 2019. "An OLG model of common ownership: Effects on consumption and investments," Journal of Macroeconomics, Elsevier, vol. 62(C).

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    More about this item

    Keywords

    Investment crowding-out; Size of the banking sector; Deposit market competition; Economic growth;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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