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

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  • 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
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    File URL: http://www.bcb.gov.br/pec/wps/ingl/wps81.pdf
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    References listed on IDEAS

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    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. repec:sbe:breart:v:24:y:2004:i:2:a:2712 is not listed on IDEAS
    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, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 56(4), October.
    4. Marcelle Chauvet, 2000. "Leading Indicators of Inflation for Brazil," Working Papers Series 7, Central Bank of Brazil, Research Department.
    5. 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.
    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. Fajardo, José & Farias, Aquiles, 2004. "Generalized Hyperbolic Distributions and Brazilian Data," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 24(2), November.
    11. 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.
    12. Eduardo Lundberg, 2000. "Monetary Policy and Banking Supervision Functions on the Central Bank," Working Papers Series 2, Central Bank of Brazil, Research Department.
    13. Mauro Costa Miranda, 2001. "Crises Cambiais e Ataques Especulativos no Brasil," Working Papers Series 32, Central Bank of Brazil, Research Department.
    14. 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.
    15. 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.
    16. Emanuel-Werner Kohlscheen, 2000. "Estimating Exchange Market Pressure and Intervention Activity," Working Papers Series 9, Central Bank of Brazil, Research Department.
    17. 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.
    18. 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.
    19. Benjamin Miranda Tabak & Solange Maria Guerra, 2002. "Stock Returns and Volatility," Working Papers Series 54, Central Bank of Brazil, Research Department.
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    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. 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, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    4. 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.
    5. 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.
    6. 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.

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