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A Macroeconomic Theory of Banking Oligopoly

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  • Dong, Mei
  • Huangfu, Stella
  • Sun, Hongfei

Abstract

We study the behavior and macroeconomic impact of oligopolistic banks in a tractable environment with micro-foundations for money and banking. Our model features oligopolistic banks, which resembles the structure of the banking sector observed in most advanced economies. Banks interact strategically where they compete against each other in terms of the volume of loans to make. We find that it is welfare-maximizing to have the banking sector as oligopolistic, i.e., to have a small number of large banks. In addition, moderate inflation improves welfare because it helps to ease congestion in the banking sector.

Suggested Citation

  • Dong, Mei & Huangfu, Stella & Sun, Hongfei, 2020. "A Macroeconomic Theory of Banking Oligopoly," Working Papers 2020-12, University of Sydney, School of Economics.
    • Handle: RePEc:syd:wpaper:2020-12
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    Keywords

    banking; oligopoly; liquidity; market frictions;
    All these keywords.

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