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Banks, oligopolistic competition, and the business cycle: A new financial accelerator approach

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  • Totzek, Alexander

Abstract

In the last two decades a body of literature highlights the role of financial frictions for explaining the development of key macroeconomic variables. Moreover, the financial crisis 2007-2009 again sheds light on the importance of this topic. In this paper, we contribute to the literature by simultaneously explaining two empirical observations. First, mark-ups on the loan market react counter-cyclical. Second, the number of banks operating in the economy significantly co-moves with GDP. Therefore, we develop a DSGE model which incorporates an oligopolistic banking sector with endogenous bank entry. The resulting model generates significant accelerating effects which are even larger than those obtained in the famous financial accelerator model of Bernanke et al. [Bernanke, B., Gertler, M., Gilchrist, S., 1999. The financial accelerator in a quantitative business cycle framework. In: Handbook of Macroeconomics. North-Holland, Amsterdam] and performs remarkable well when comparing the generated second moments of real and financial variables with those observed in the data.

Suggested Citation

  • Totzek, Alexander, 2011. "Banks, oligopolistic competition, and the business cycle: A new financial accelerator approach," Economics Working Papers 2011-02, Christian-Albrechts-University of Kiel, Department of Economics.
  • Handle: RePEc:zbw:cauewp:201102
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    More about this item

    Keywords

    Oligopolistic competition; Bank entry; Financial accelerator;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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