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Competition among banks and the pass-through of monetary policy

  • Jochen H. F. Güntner


    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

Empirically, stiffer competition among commercial banks implies that (i) loan rates and deposit rates correlate more tightly with the policy rate, (ii) loan rates exceed the policy rate less, and (iii) deposit rates undercut the policy rate more. I find that a New Keynesian model with monopolistically competitive banks can account for the first two of these empirical facts. The model predicts that increased competition in the banking sector reduces the spread between the steady-state policy rate and the loan rate. Furthermore, augmented competition among banks amplifies the pass-through of monetary policy to the real economy.

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Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 09035.

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Length: 45 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:mag:wpaper:09035
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