The role of financial sector competition for monetary policy

Edgar A. Ghossoub, Thanarak Laosuthi and Robert Reed ()

Canadian Journal of Economics, 2012, vol. 45, issue 1, 270-287

Abstract: In this paper, we examine the impact of competition in the banking industry on financial market activity. In particular, we explore this issue in a setting where banks simultaneously insure individuals against liquidity risk and offer loans to promote intertemporal consumption smoothing. In addition, spatial separation and private information generate a transactions role for money. Interestingly, we demonstrate that the industrial organization of the financial system bears significant implications for the effects 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.

JEL-codes: E43 E52 L11 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (14)

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