Imperfect Banking Competition and the Propagation of Uncertainty Shocks

Tommaso Gasparini

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Uncertainty shocks play a crucial role in driving business cycle fluctuations. This paper investigates the impact of changes in banking competition on the propagation of uncertainty shocks. Using a panel dataset of 44 countries, I show that lower banking competition amplifies the negative impact of uncertainty on output growth. I further explore this relationship through a dynamic stochastic general equilibrium model featuring imperfect banking competition and financial frictions. The model shows that lower banking competition leads to higher borrowing rates and increased risk-taking by entrepreneurs. As a result, when the number of competitors is lower, uncertainty shocks have a stronger negative impact on defaults, investment and output due to increased risk-taking.

Keywords: Financial Frictions; Financial Intermediaries; Heterogeneous Agents; Market Power; Uncertainty (search for similar items in EconPapers)
JEL-codes: E32 E44 G21 L13 (search for similar items in EconPapers)
Pages: 58
Date: 2023-04
New Economics Papers: this item is included in nep-ban, nep-com, nep-dge, nep-fdg and nep-rmg
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