Endogenous market structures in the credit market and Ricardian equivalence

Federico Etro ()

Economics Letters, 2016, vol. 140, issue C, 14-18

Abstract: We analyze the impact of imperfect competition in banking on fiscal policy in a dynamic model. In an exchange two-period economy the impact of deficit spending is to reduce private consumption and increase the spread between deposit and lending rates. The reason is that a tax cut forces consumers to save more and makes their supply of savings more rigid, which softens competition between banks leading to lower rates on deposits and a more than proportional increase in savings. In a closed production economy this reduces the equilibrium interest rate on borrowers, which promotes private investment.

Keywords: Ricardian equivalence; Credit market; Endogenous entry,; Optimal fiscal policy (search for similar items in EconPapers)
JEL-codes: E4 H6 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:140:y:2016:i:c:p:14-18

DOI: 10.1016/j.econlet.2015.11.042

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