Banking Competition, Production Externalities, and the Effects of Monetary Policy

Edgar Ghossoub () and Robert Reed
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Edgar Ghossoub: UTSA

Working Papers from College of Business, University of Texas at San Antonio

Abstract: Since the global financial crisis, there has been a significant amount of concern about the presence of large-scale financial intermediaries which affects the competitive landscape of the banking sector in advanced economies. In light of this issue, this paper develops a framework to demonstrate how the degree of concentration impacts capital accumulation and economic growth. As is standard in the growth literature, we incorporate production externalities from the aggregate capital stock which promote economic development and growth over time. Notably, the model demonstrates that higher degrees of concentration distort economic activity by interrupting the externalities from capital investment. We also show that the ability of monetary policy to provide a favorable growth environment and achieve price stability is hampered by higher degrees of concentration. Consequently, the task of central banking will be more difficult as the sector further consolidates over time. Furthermore, the developing world will not be immune to these challenges facing regulators and policymakers in advanced economies. Length: 33 pages

Keywords: Banking Competition; Production Externality; Optimal Monetary Policy (search for similar items in EconPapers)
JEL-codes: D42 E52 G21 O42 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:tsa:wpaper:0167eco

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