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Central Bank Liquidity Provision and Financial Sector Competition This paper presents a general equilibrium production economy where money is essential and financial intermediaries provide important economic functions. In this setting, we study the effects of liquidity provision by the monetary authority under two different banking structures: a perfectly competitive and a fully concentrated banking system. When the banking sector is perfectly competitive, liquidity injections through an open market purchase stimulate capital investment and production. Interestingly, an expansionary monetary policy can become contractionary when the banking sector is fully concentrated. This necessarily happens in economies where government liabilities constitute a large fraction of total deposits and inflation is high. Moreover, we demonstrate that imperfect banking competition is a source of indeterminacy of dynamical equilibria. More specifically, the economy can display Hopf bifurcation. However, monetary policy plays an important role in controlling deterministic cycles and endogenous volatility that could arise under a fully concentrated banking sector

  • Hamid Beladi

    (University of Texas at San Antonio)

  • Edgar Ghossoub

    (University of Texas at San Antonio)

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Paper provided by College of Business, University of Texas at San Antonio in its series Working Papers with number 0002.

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Length: 34 pages
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Handle: RePEc:tsa:wpaper:002
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