Money and imperfectly competitive credit

Allen Head (), Timothy Kam, Sam Ng and Guangqian Pan

Journal of Economic Theory, 2025, vol. 228, issue C

Abstract: We develop a monetary economy in which banks have market power emanating from search frictions. Distributions of both deposit and loan interest rates are equilibrium phenomena exhibiting dispersion consistent with new micro-level evidence on U.S. consumer loans and deposits. The theory accounts for incomplete pass-through of monetary policy to the distributions of loan and deposit rates through a novel channel. Imperfect competition links monetary policy to real consumption and welfare through its effects on interest rate spreads driven by market power and individual liquidity risk. Market power in deposits erodes the insurance banks provide against liquidity risk, while market power in lending enables banks to extract surplus from goods market trades. For a given inflation target, welfare gains arise if a central bank uses state-contingent monetary injections to reduce lenders' market power in response to fluctuations in aggregate demand.

Keywords: Liquidity; Interest spreads; Bank market power; Stabilization (search for similar items in EconPapers)
JEL-codes: E41 E44 E51 E63 G21 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Money and Imperfectly Competitive Credit (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:228:y:2025:i:c:s0022053125000961

DOI: 10.1016/j.jet.2025.106050

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