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The Role of Financial Sector Competition for Monetary Policy

Author

Listed:
  • Edgar A. Ghossoub

    (The University of Texas at San Antonio)

  • Robert Reed

    (University of Alabama Tuscaloosa)

  • Thanarak Laosuthi

    (Kassetsart University)

Abstract

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.

Suggested Citation

  • Edgar A. Ghossoub & Robert Reed & Thanarak Laosuthi, 2008. "The Role of Financial Sector Competition for Monetary Policy," Working Papers 0069, College of Business, University of Texas at San Antonio.
  • Handle: RePEc:tsa:wpaper:0069
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    File URL: http://interim.business.utsa.edu/wps/eco/0069ECO-566-2009.pdf
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    References listed on IDEAS

    as
    1. Bruce D. Smith & Beatrix Paal & Ke Wang, 2005. "Monopoly versus Competition in Banking: Some Implications for Growth and Welfare," 2005 Meeting Papers 435, Society for Economic Dynamics.
    2. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-971, December.
    3. Mark G. Guzman, 2000. "Bank structure, capital accumulation and growth: a simple macroeconomic model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(2), pages 421-455.
    4. Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-864, November.
    5. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-945, September.
    6. Gert Peersman, 2004. "The Transmission of Monetary Policy in the Euro Area: Are the Effects Different Across Countries?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(3), pages 285-308, July.
    7. Antinolfi, Gaetano & Kawamura, Enrique, 2008. "Banks and markets in a monetary economy," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 321-334, March.
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    Citations

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    Cited by:

    1. Ghossoub, Edgar A., 2012. "Liquidity risk and financial competition: Implications for asset prices and monetary policy," European Economic Review, Elsevier, vol. 56(2), pages 155-173.
    2. Tarishi Matsuoka, 2011. "Monetary Policy and Banking Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(6), pages 1109-1129, September.
    3. Ghossoub, Edgar A. & Reed, Robert R., 2015. "The size distribution of the banking sector and the effects of monetary policy," European Economic Review, Elsevier, vol. 75(C), pages 156-176.

    More about this item

    Keywords

    Monetary Policy; Financial Sector Concentration; Price Competition;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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