IDEAS home Printed from https://ideas.repec.org/p/bcb/wpaper/81.html
   My bibliography  Save this paper

Bank Competition, Agency Costs and the Performance of the Monetary Policy

Author

Listed:
  • Leonardo Soriano de Alencar
  • Márcio I. Nakane

Abstract

This paper extends the general equilibrium literature on bank competition in order to evaluate its role on the performance of the monetary policy. A new formulation of a financial contract taking into consideration both market power by banks as well as costly state verification is proposed here. Numerical simulations with the model economy parameterized to the Brazilian case are performed. Two cases are examined: One in which the banking sector is perfectly competitive and the other one when banks have market power. The main conclusions of the paper are the following: (1) Greater competition in the loan market enhances the response of the real economy to an interest rate shock; (2) Increased competition and/or a more efficient verification technology reduce the reaction of both the default rate and of the bank interest spread to an interest rate shock; and (3) The influence of the verification technology in the economy's dynamic response is greater when banks operate under perfect competition.

Suggested Citation

  • Leonardo Soriano de Alencar & Márcio I. Nakane, 2004. "Bank Competition, Agency Costs and the Performance of the Monetary Policy," Working Papers Series 81, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:81
    as

    Download full text from publisher

    File URL: https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/wps81.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Octavio Manuel Bessada Lion & Carlos Alberto Nunes Cosenza & César das Neves, 2003. "Aplicação do Modelo de Black, Derman & Toy à Precificação de Opções Sobre Títulos de Renda Fixa," Working Papers Series 74, Central Bank of Brazil, Research Department.
    2. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    3. Bonomo, Marco Antonio Cesar & Brito, Ricardo D., 2002. "Regras Monetárias e Dinâmica Macroeconômica no Brasil: Uma Abordagem de Expectativas Racionais," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 56(4), October.
    4. Joel Bogdanski & Paulo Springer de Freitas & Ilan Goldfajn & Alexandre Tombini, 2002. "Inflation Targeting in Brasil: Shocks. Backward-Looking Prices and IMF Conditionality," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.),Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 13, pages 539-582, Central Bank of Chile.
    5. Tarsila Segalla Afanasieff & Priscilla Maria Villa Lhacer & Márcio I. Nakane, 2002. "The Determinants of Bank Interest Spread in Brazil," Money Affairs, CEMLA, vol. 0(2), pages 183-207, July-Dece.
    6. Pedro H. Albuquerque, 2001. "Os Impactos Econômicos da CPMF: Teoria e Evidência," Anais do XXIX Encontro Nacional de Economia [Proceedings of the 29th Brazilian Economics Meeting] 029, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    7. Victorio Y. T. Chu & Márcio I. Nakane, 2001. "Credit Channel without the LM Curve," Working Papers Series 20, Central Bank of Brazil, Research Department.
    8. Francisco Marcos Rodrigues Figueiredo, 2001. "Evaluating Core Inflation Measures for Brazil," Working Papers Series 14, Central Bank of Brazil, Research Department.
    9. Francisco Marcos R. Figueiredo & Roberta Blass Staub, 2001. "Algumas Considerações Sobre a Sazonalidade no IPCA," Working Papers Series 31, Central Bank of Brazil, Research Department.
    10. Joel Bogdanski & Alexandre Antonio Tombini & Sergio R. Da C. Werlang, 2001. "Implementing Inflation Targeting in Brazil," Money Affairs, CEMLA, vol. 0(1), pages 1-23, January-J.
    11. Paulo Coutinho & Benjamin Miranda Tabak, 2003. "Decentralized Portfolio Management," Brazilian Review of Finance, Brazilian Society of Finance, vol. 1(2), pages 243-270.
    12. Fajardo, José & Farias, Aquiles, 2004. "Generalized Hyperbolic Distributions and Brazilian Data," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 24(2), November.
    13. Pedro H. Albuquerque, 2003. "A practical log-linear aggregation method with examples: heterogeneous income growth in the USA," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(6), pages 665-678.
    14. Minella, Andre & de Freitas, Paulo Springer & Goldfajn, Ilan & Muinhos, Marcelo Kfoury, 2003. "Inflation targeting in Brazil: constructing credibility under exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 1015-1040, December.
    15. Victorio Yi Tson Chu, 2002. "Credit Channel with Sovereign Credit Risk: an Empirical Test," Working Papers Series 51, Central Bank of Brazil, Research Department.
    16. Sergio Afonso Lago Alves, 2001. "Avaliação das Projeções do Modelo Estrutural do Banco Central do Brasil para a Taxa de Variação do IPCA," Working Papers Series 16, Central Bank of Brazil, Research Department.
    17. Benjamin Miranda Tabak & Sandro Canesso de Andrade, 2003. "Testing the Expectations Hypothesis in the Brazilian Term Structure of Interest Rates," Brazilian Review of Finance, Brazilian Society of Finance, vol. 1(1), pages 19-43.
    18. Pedro H. Albuquerque, 2003. "A practical log-linear aggregation method with examples: heterogeneous income growth in the USA," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(6), pages 665-678.
    19. Benjamin Miranda Tabak & Eduardo José Araújo Lima, 2002. "The Effects of the Brazilian ADRs Program on Domestic Market Efficiency," Working Papers Series 43, Central Bank of Brazil, Research Department.
    20. Mauro Costa Miranda, 2001. "Crises Cambiais e Ataques Especulativos no Brasil," Working Papers Series 32, Central Bank of Brazil, Research Department.
    21. Leonardo Soriano de Alencar & Márcio I. Nakane, 2003. "Real Balances in the Utility Function: Evidence for Brazil," Working Papers Series 68, Central Bank of Brazil, Research Department.
    22. Michael F. Bryan & Stephen G. Cecchetti, 2001. "A Note on the Efficient Estimation of Inflation in Brazil," Working Papers Series 11, Central Bank of Brazil, Research Department.
    23. Luiz Fernando Figueiredo & Pedro Fachada & Sérgio Goldenstein, 2002. "Public debt management and open market operations in Brazil," BIS Papers chapters, in: Bank for International Settlements (ed.), The development of bond markets in emerging economies, volume 11, pages 81-85, Bank for International Settlements.
    24. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    25. Sérgio Ribeiro da Costa Werlang, 2000. "Private Sector Participation: A Theoretical Justification of the Brazilian Position," Working Papers Series 3, Central Bank of Brazil, Research Department.
    26. André Minella, 2002. "Optimal Monetary Policy, Gains from Commitment, and Inflation Persistence," Working Papers Series 45, Central Bank of Brazil, Research Department.
    27. Emanuel-Werner Kohlscheen, 2000. "Estimating Exchange Market Pressure and Intervention Activity," Working Papers Series 9, Central Bank of Brazil, Research Department.
    28. André Minella & Paulo Springer de Freitas & Ilan Goldfajn & Marcelo Kfoury Muinhos, 2003. "Inflation targeting in Brazil: lessons and challenges," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 106-133, Bank for International Settlements.
    29. Orlando Carneiro de Matos, 2002. "Desenvolvimento do Sistema Financeiro e Crescimento Econômico no Brasil: Evidências de Causalidade," Working Papers Series 49, Central Bank of Brazil, Research Department.
    30. Barry Eichengreen, 2006. "Can Emerging Markets Float? Should They Inflation Target?," Chapters, in: Matías Vernengo (ed.), Monetary Integration and Dollarization, chapter 8, Edward Elgar Publishing.
    31. Francisco Marcos R. Figueiredo & Thaís Porto Ferreira, 2002. "Os Preços Administrados e a Inflação no Brasil," Working Papers Series 59, Central Bank of Brazil, Research Department.
    32. 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.
    33. Benjamin Miranda Tabak, 2002. "The Random Walk Hypothesis and the Behavior of Foreign Capital Portfolio Flows: the Brazilian Stock Market Case," Working Papers Series 58, Central Bank of Brazil, Research Department.
    34. Marcelle Chauvet, 2000. "Leading Indicators of Inflation for Brazil," Working Papers Series 7, Central Bank of Brazil, Research Department.
    35. Marcelo Kfoury Muinhos & Sérgio Afonso Lago Alves & Gil Riella, 2002. "Modelo Estrutural com Setor Externo: Endogenização do Prêmio de Risco e do Câmbio," Working Papers Series 42, Central Bank of Brazil, Research Department.
    36. Araújo, Aloísio Pessoa de & Leon, Márcia Saraiva, 2002. "Speculative attacks on debts, dollarization and optimum currency areas," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 446, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    37. Marcelo Kfoury Muinhos, 2001. "Inflation Targeting in an Open Financially Integrated Emerging Economy: the case of Brazil," Working Papers Series 26, Central Bank of Brazil, Research Department.
    38. Fabio Araujo & Marta Baltar Moreira Areosa & José Alvaro Rodrigues Neto, 2003. "r-filters: a Hodrick-Prescott Filter Generalization," Working Papers Series 69, Central Bank of Brazil, Research Department.
    39. Charles Lima De Almeida & Marco Aur�LIO Peres & Geraldo Da Silva E Souza & Benjamin Miranda Tabak, 2003. "Optimal monetary rules: the case of Brazil," Applied Economics Letters, Taylor & Francis Journals, vol. 10(5), pages 299-302, April.
    40. Paulo Springer de Freitas & Marcelo Kfoury Muinhos, 2001. "A Simple Model for Inflation Targeting in Brazil," Working Papers Series 18, Central Bank of Brazil, Research Department.
    41. Eduardo Lundberg, 2000. "Política Monetária e Supervisão do Sistema Financeiro Nacional no Banco Central do Brasil," Working Papers Series 2, Central Bank of Brazil, Research Department.
    42. Ilan Goldfajn & Sérgio Ribeiro da Costa Werlang, 2000. "The Pass-through from Depreciation to Inflation: A Panel Study," Working Papers Series 5, Central Bank of Brazil, Research Department.
    43. Benjamin Miranda Tabak, 2003. "On the Information Content of Oil Future Prices," Working Papers Series 65, Central Bank of Brazil, Research Department.
    44. Arnildo da Silva Correa, 2003. "Diferenças e Semelhanças entre Países da América Latina: Uma Análise de Markov Switching para os Ciclos Econômicos de Brasil e Argentina," Working Papers Series 80, Central Bank of Brazil, Research Department.
    45. Arminio Fraga & Daniel L. Gleizer, 2001. "Constrained Discretion and Collective Action Problems: Reflections on the Resolution of International Financial Crises," Working Papers Series 34, Central Bank of Brazil, Research Department.
    46. Marcelo Kfoury Muinhos & Sergio Afonso Lago Alves, 2003. "Medium-Size Macroeconomic Model for the Brazilian Economy," Working Papers Series 64, Central Bank of Brazil, Research Department.
    47. Benjamin Miranda Tabak Eduardo José Araújo Lima, 2002. "Causality and Cointegration in Stock Markets: The Case of Latin America," Working Papers Series 56, Central Bank of Brazil, Research Department.
    48. Benjamin Miranda Tabak. Solange Maria Guerra, 2002. "Stock Returns and Volatility," Working Papers Series 54, Central Bank of Brazil, Research Department.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Capeleti, Paulo & Garcia, Marcio & Miessi Sanches, Fabio, 2022. "Countercyclical credit policies and banking concentration: Evidence from Brazil," Journal of Banking & Finance, Elsevier, vol. 143(C).
    2. André Soares Loureiro & Fernando de Holanda Barbosa, 2004. "Risk Premia for Emerging Markets Bonds: Evidence from Brazilian Government Debt, 1996-2002," Working Papers Series 85, Central Bank of Brazil, Research Department.
    3. Thiago Trafane Oliveira Santos, 2021. "High Lending Interest Rates in Brazil: cost or concentration?," Working Papers Series 550, Central Bank of Brazil, Research Department.
    4. Gunji, Hiroshi & Miura, Kazuki & Yuan, Yuan, 2009. "Bank competition and monetary policy," Japan and the World Economy, Elsevier, vol. 21(1), pages 105-115, January.
    5. Araújo, Aloísio Pessoa de & Leon, Márcia Saraiva, 2003. "Speculative attacks on debts and optimum currency area: a welfare analysis," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 514, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    6. Yang, Jun & Shao, Hanhua, 2016. "Impact of bank competition on the bank lending channel of monetary transmission: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 468-481.
    7. Miguel Cantillo, 2023. "Imperfect bank competition, borrower adverse selection, and the transmission of monetary policy," Working Papers 202301, Universidad de Costa Rica, revised Mar 2023.
    8. Amidu, Mohammed & Wolfe, Simon, 2013. "The effect of banking market structure on the lending channel: Evidence from emerging markets," Review of Financial Economics, Elsevier, vol. 22(4), pages 146-157.
    9. Zhan, Shurui & Tang, Yangfei & Li, Shuai & Yao, Yaojun & Zhan, Minghua, 2021. "How does the money market development impact the bank lending channel of emerging Countries? A case from China," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    10. Mohammed Amidu & Simon Wolfe, 2013. "The effect of banking market structure on the lending channel: Evidence from emerging markets," Review of Financial Economics, John Wiley & Sons, vol. 22(4), pages 146-157, November.
    11. Leroy, Aurélien, 2014. "Competition and the bank lending channel in Eurozone," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 296-314.
    12. Marcelo Kfoury Muinhos & Márcio I. Nakane, 2006. "Comparing equilibrium real interest rates: different approaches to measure Brazilian rates," Working Papers Series 101, Central Bank of Brazil, Research Department.
    13. Mohamed Sadok Gassouma & Kais Ben-Ahmed, 2021. "The Role Of Foreign Banks In The Transmission Of Monetary Policy: Empirical Evidence From Tunisia," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 66(228), pages 101-122, January –.

    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. Araújo, Aloísio Pessoa de & Leon, Márcia Saraiva, 2003. "Speculative attacks on debts and optimum currency area: a welfare analysis," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 514, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    2. André Soares Loureiro & Fernando de Holanda Barbosa, 2004. "Risk Premia for Emerging Markets Bonds: Evidence from Brazilian Government Debt, 1996-2002," Working Papers Series 85, Central Bank of Brazil, Research Department.
    3. Marcelo Kfoury Muinhos & Márcio I. Nakane, 2006. "Comparing equilibrium real interest rates: different approaches to measure Brazilian rates," Working Papers Series 101, Central Bank of Brazil, Research Department.
    4. Arminio Fraga & Ilan Goldfajn & André Minella, 2004. "Inflation Targeting in Emerging Market Economies," NBER Chapters, in: NBER Macroeconomics Annual 2003, Volume 18, pages 365-416, National Bureau of Economic Research, Inc.
    5. Minella, Andre & de Freitas, Paulo Springer & Goldfajn, Ilan & Muinhos, Marcelo Kfoury, 2003. "Inflation targeting in Brazil: constructing credibility under exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 1015-1040, December.
    6. Benjamin Miranda Tabak, 2003. "Monetary Policy Surprises and the Brazilian Term Structure of Interest Rates," Working Papers Series 70, Central Bank of Brazil, Research Department.
    7. Leonardo Soriano de Alencar & Márcio I. Nakane, 2003. "Real Balances in the Utility Function: Evidence for Brazil," Working Papers Series 68, Central Bank of Brazil, Research Department.
    8. Alexandre A. Tombini & Sergio A. Lago Alves, 2006. "The Recent Brazilian Disinflation Process and Costs," Working Papers Series 109, Central Bank of Brazil, Research Department.
    9. Benjamin Miranda Tabak, 2003. "On the Information Content of Oil Future Prices," Working Papers Series 65, Central Bank of Brazil, Research Department.
    10. Charles Lima De Almeida & Marco Aur�LIO Peres & Geraldo Da Silva E Souza & Benjamin Miranda Tabak, 2003. "Optimal monetary rules: the case of Brazil," Applied Economics Letters, Taylor & Francis Journals, vol. 10(5), pages 299-302, April.
    11. Paulo Coutinho & Benjamin Miranda Tabak, 2002. "Delegated Portfolio Management," Working Papers Series 60, Central Bank of Brazil, Research Department.
    12. Sergio R. S. Souza & Benjamin M. Tabak & Daniel O. Cajueiro, 2008. "Long-Range Dependence In Exchange Rates: The Case Of The European Monetary System," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(02), pages 199-223.
    13. Benjamin Miranda Tabak. Solange Maria Guerra, 2002. "Stock Returns and Volatility," Working Papers Series 54, Central Bank of Brazil, Research Department.
    14. Victorio Yi Tson Chu, 2002. "Credit Channel with Sovereign Credit Risk: an Empirical Test," Working Papers Series 51, Central Bank of Brazil, Research Department.
    15. Aloísio P. Araújo & José Valentim M. Vicente, 2006. "Contagion, Bankruptcy and Social Welfare Analysis in a Financial Economy with Risk Regulation Constraint," Working Papers Series 118, Central Bank of Brazil, Research Department.
    16. Angelo Marsiglia Fasolo, 2006. "Interdependence and Contagion: an Analysis of Information Transmission in Latin America's Stock Markets," Working Papers Series 112, Central Bank of Brazil, Research Department.
    17. Tarsila Segalla Afanasieff & Priscilla Maria Villa Lhacer & Márcio I. Nakane, 2002. "The Determinants of Bank Interest Spread in Brazil," Money Affairs, CEMLA, vol. 0(2), pages 183-207, July-Dece.
    18. Mauricio S. Bugarin & Fabia A. de Carvalho, 2005. "Comment on ‘Market discipline and monetary policy’ by Carl Walsh," Oxford Economic Papers, Oxford University Press, vol. 57(4), pages 732-739, October.
    19. Eui Jung Chang & Marcelo Kfoury Muinhos & Joanílio Rodolpho Teixeira, 2002. "Macroeconomic Coordination and Inflation Targeting in a Two-Country Model," Working Papers Series 50, Central Bank of Brazil, Research Department.
    20. Tito Nícias Teixeira da Silva Filho, 2001. "Estimando o Produto Potencial Brasileiro: Uma Abordagem de Função de Produção," Working Papers Series 17, Central Bank of Brazil, Research Department.

    More about this item

    Statistics

    Access and download statistics

    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:bcb:wpaper:81. See general information about how to correct material in RePEc.

    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: Rodrigo Barbone Gonzalez (email available below). General contact details of provider: https://www.bcb.gov.br/en .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.