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Oligopoly banking, risky investment, and monetary policy

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  • Altermatt, Lukas
  • Wang, Zijian

Abstract

Oligopolistic competition in the banking sector and risk in the real economy are important characteristics of many economies. We build a model of monetary policy transmission that incorporates these characteristics which allows us to analyze the long-run consequences of variations in the degree of banking competition. We show theoretically that various equilibrium cases can occur, and that the effect of monetary policy varies greatly across equilibrium cases. We calibrate the model to the U.S. economy in 2016-2019 and find that monetary policy pass-through is incomplete under imperfect competition. Further, we show that a decrease in the policy rate during the calibration period would have increased expected welfare, but also bank default probability.

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  • Altermatt, Lukas & Wang, Zijian, 2024. "Oligopoly banking, risky investment, and monetary policy," European Economic Review, Elsevier, vol. 164(C).
    • Handle: RePEc:eee:eecrev:v:164:y:2024:i:c:s0014292124000333
    DOI: 10.1016/j.euroecorev.2024.104704
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    More about this item

    Keywords

    Oligopoly competition; Risky investment; Financial intermediation; Monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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