IDEAS home Printed from https://ideas.repec.org/p/red/sed009/1118.html
   My bibliography  Save this paper

Bank Competition and Economic Stability: The Role of Monetary Policy

Author

Listed:
  • Sylvain Champonnois

    (Rady School of Management, University of California, San Diego)

Abstract

This paper analyzes the dual role of monetary policy for economic efficiency and stability in a model of endogenous bank competition. Multiple equilibria emerge from the complementarity between bank and non-financial firm decisions. Adverse aggregate or idiosyncratic liquidity shocks may cause a breakdown in which the economy collapses into a no-production equilibrium. Less bank competition improves the profitability of banks and makes the economy less vulnerable to adverse shocks but it also distorts the efficient allocation of capital. This stability/efficiency tradeoff creates a motive for monetary policy to be tight when liquidity is abundant to spur bank competition and to be loose in bad times to restore the profitability of banks and decrease the likelihood of economic and financial crashes.

Suggested Citation

  • Sylvain Champonnois, 2009. "Bank Competition and Economic Stability: The Role of Monetary Policy," 2009 Meeting Papers 1118, Society for Economic Dynamics.
  • Handle: RePEc:red:sed009:1118
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2009/paper_1118.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Nicola Cetorelli & Philip E. Strahan, 2006. "Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets," Journal of Finance, American Finance Association, vol. 61(1), pages 437-461, February.
    2. repec:hrv:faseco:30747190 is not listed on IDEAS
    3. Jonathan Vogel, 2008. "Spatial Competition with Heterogeneous Firms," Journal of Political Economy, University of Chicago Press, vol. 116(3), pages 423-466, June.
    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. JaeBin Ahn, 2011. "A Theory of Domestic and International Trade Finance," IMF Working Papers 11/262, International Monetary Fund.

    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:red:sed009:1118. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.