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Market power in banking, countercyclical margins and the international transmission of business cycles

Maria Olivero ()

Journal of International Economics, 2010, vol. 80, issue 2, 292-301

Abstract: By introducing an imperfectly competitive banking sector into a standard two-country, two-good RBC model with complete asset markets, we study the international transmission of aggregate TFP shocks in an environment with noncompetitive financial intermediation. In this model, price-cost margins in a global loan market are endogenous and countercyclical. As a result, a positive TFP shock in one country spills over to another through a reduction in the global cost of both credit and externally financed investment. The quantitative analysis shows that countercyclical margins on loans play a key role in bringing the predictions of the theory closer to the observed cross-country cyclical co-movements of consumption, employment, investment and output. Recessions are deeper when the cost of credit rises during these economic downturns. Thus, a financial accelerator arises in our framework, unveiling the increased importance of stabilization policies in economies where margins in credit markets are countercyclical.

Keywords: International; RBC; Imperfect; competition (search for similar items in EconPapers)
Date: 2010
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Handle: RePEc:eee:inecon:v:80:y:2010:i:2:p:292-301