Banking Competition and Effectiveness of Monetary Policy Transmission: A Theoretical and Empirical Assessment on Indonesia case

Elis Deriantino
Authors registered in the RePEc Author Service: Elis Deriantino Naiborhu

International Journal of Economic Sciences, 2013, vol. 2013, issue 3

Abstract: This study compares banking behavior towards monetary policy rate changes in two different markets, i.e. a market in absence of collusive (a more competitive market) and a collusive market (a less competitive market). It expands Monti Klein model of monopolistic bank by incorporating Capital Adequacy Requirement (CAR) ratio as a measure to promote resilience of banking system. Empirical assessment by utilizing Lerner index as a competition measure on Indonesia banking industry over the periode of 2001-2012 supports theoretical finding in loan market, where a more competitive bank is significantly more responsive in adjusting its loan rates to changes in monetary policy rate, implying bank competition may enhance effectiveness of monetary policy transmission in loan market. Moreover, we find that imposition of macroprudential measure of CAR does not significantly alter the transmission mechanism in both deposits and loan markets, implying there is no trade off between promoting a more resilient banking system and effectiveness of monetary policy transmission to banking industry.

Keywords: bank intermediation; monetary policy transmission; bank competition (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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