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The Role of Financial Sector Competition for Monetary Policy

  • Edgar A. Ghossoub

    (The University of Texas at San Antonio)

  • Robert Reed

    (University of Alabama Tuscaloosa)

  • Thanarak Laosuthi

    (Kassetsart University)

In this paper, we examine the impact of competition in the banking industry on ?nancial market activity. In particular, we explore this issue in a setting where banks simultaneously insure individuals against liquid- ity risk and o¤er loans to promote intertemporal consumption smoothing. In addition, spatial separation and private information generate a trans- actions role for money. Interestingly, we demonstrate that the industrial organization of the ?nancial system bears signi?cant implications for the e¤ects of monetary policy. Under perfect competition, higher rates of money growth lead to lower interest rates and a higher volume of lending activity. In contrast, in a monopoly banking sector, money growth restricts the availability of funds and raises the cost of borrowing.

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File URL: http://business.utsa.edu/wps/eco/0069ECO-566-2009.pdf
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Paper provided by College of Business, University of Texas at San Antonio in its series Working Papers with number 0069.

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Length: 23 pages
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Handle: RePEc:tsa:wpaper:0069
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