Money, Credit and Imperfect Competition Among Banks

Allen Head (), Timothy Kam, Ieng Man (Sam) Ng and Isaac Pan

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: Using micro-level data for the U.S., we provide new evidence—at national and state levels—of a positive (negative) relationship between the standard deviation (coefficient of variation) and the average in bank lending-rate markups. In a quantitative theory consistent with these empirical observations, banks’ lending market power is determined in equilibrium and is a novel channel of monetary policy. At low inflation, banks tend to extract higher markups from existing loan customers rather than competing for additional loans. As a result, banking activity need not be welfare-improving if inflation is sufficiently low. This result speaks to concerns regarding market power in the banking sectors of low-inflation countries. Normatively, under a given inflation target, welfare gains arise if a central bank can use additional liquidity-provision (or tax-and-transfer) instruments to offset banks’ market-power incentives.

Keywords: Banking and Credit; Markups Dispersion; Market Power; Stabilization Policy; Liquidity (search for similar items in EconPapers)
JEL-codes: E41 E44 E51 E63 G21 (search for similar items in EconPapers)
Date: 2022-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-com, nep-cwa, nep-dge, nep-mac and nep-mon
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Working Paper: Money, credit and imperfect competition among banks (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:acb:cbeeco:2022-684

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