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

  • Leonardo Soriano de Alencar
  • Márcio I. Nakane

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.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps81.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 81.

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Date of creation: Jan 2004
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Handle: RePEc:bcb:wpaper:81
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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  1. 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.
  2. Bonomo, M. A. & Brito, R.D., 2001. "Regras Monetárias e Dinâmica Macroeconomica no Brasil: uma abordagem de expectativas racionais," Insper Working Papers wpe_11, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  3. 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.
  4. Pedro H. Albuquerque, 2000. "An Information Theory Approach to the Aggregation of Log-Linear Models," Working Papers Series 4, Central Bank of Brazil, Research Department.
  5. Marcelle Chauvet, 2000. "Leading Indicators of Inflation for Brazil," Working Papers Series 7, Central Bank of Brazil, Research Department.
  6. Victorio Y. T. Chu & Márcio I. Nakane, 2001. "Credit Channel without the LM Curve," Working Papers Series 20, Central Bank of Brazil, Research Department.
  7. 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.
  8. Fajardo, J. & Farias, A., 2003. "Generalized Hyperbolic Distributions and Brazilian Data," Finance Lab Working Papers flwp_57, Finance Lab, Insper Instituto de Ensino e Pesquisa.
  9. Emanuel-Werner Kohlscheen, 2000. "Estimating Exchange Market Pressure and Intervention Activity," Working Papers Series 9, Central Bank of Brazil, Research Department.
  10. Benjamin Miranda Tabak & Solange Maria Guerra, 2002. "Stock Returns and Volatility," Working Papers Series 54, Central Bank of Brazil, Research Department.
  11. Eduardo Lundberg, 2000. "Monetary Policy and Banking Supervision Functions on the Central Bank," Working Papers Series 2, Central Bank of Brazil, Research Department.
  12. 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.
  13. 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.
  14. Pedro H. Albuquerque, 2005. "Os Impactos Econômicos da CPMF: Teoria e Evidência," Public Economics 0511020, EconWPA, revised 26 Nov 2005.
  15. 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.
  16. Mauro Costa Miranda, 2001. "Crises Cambiais e Ataques Especulativos no Brasil," Working Papers Series 32, Central Bank of Brazil, Research Department.
  17. Francisco Marcos Rodrigues Figueiredo, 2001. "Evaluating Core Inflation Measures for Brazil," Working Papers Series 14, Central Bank of Brazil, Research Department.
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