The Role of Financial Sector Competition for Monetary Policy

Edgar Ghossoub, Robert Reed and Thanarak Laosuthi
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Edgar Ghossoub: The University of Texas at San Antonio
Robert Reed: University of Alabama Tuscaloosa
Thanarak Laosuthi: Kassetsart University

No 69, Working Papers from College of Business, University of Texas at San Antonio

Abstract: In this paper, we examine the impact of competition in the banking industry on ?nancial market activity. In particular, we explore this issue in a setting where banks simultaneously insure individuals against liquid- ity risk and o¤er loans to promote intertemporal consumption smoothing. In addition, spatial separation and private information generate a trans- actions role for money. Interestingly, we demonstrate that the industrial organization of the ?nancial system bears signi?cant implications for the e¤ects 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.

Keywords: Monetary Policy; Financial Sector Concentration; Price Competition (search for similar items in EconPapers)
JEL-codes: E43 E52 L11 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2008-12-21
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