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Financial instability, oligopolistic banking, and monetary growth

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  • Stefan Jungblut

Abstract

This paper analyzes the dynamics of a monetary economy which is characterized by increasing returns to scale in financial intermediation. The intermediation technology is linear in deposits, but its operation requires a fixed verification cost to overcome the asymmetric information about a borrower's investment outcome. Intermediaries, termed banks, can avoid the costly duplication of information disclosure. Due to the non--convexity in intermediation activities, two stationary monetary equilibria exist. The first is a saddle with high economic activity and high competition in banking. In the second equilibrium, competition between banks and economic activity are low. Under adverse economic conditions, the low activity equilibrium can bifurcate into a sink and the economy may experience periods of financial instability and banking crises. Although crises are random events, the economy's exposure to financial instabilities depends on fundamental conditions. Thus, the predictive power of fundamentals does not contradict the random theory of crises. Copyright 2004, Oxford University Press.

Suggested Citation

  • Stefan Jungblut, 2004. "Financial instability, oligopolistic banking, and monetary growth," Oxford Economic Papers, Oxford University Press, vol. 56(3), pages 513-538, July.
    • Handle: RePEc:oup:oxecpp:v:56:y:2004:i:3:p:513-538
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    File URL: http://hdl.handle.net/10.1093/oep/gpf051
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    Cited by:

    1. Binglin Gong & Haiwen Zhou, 2014. "Financial development, the choice of technology, and comparative advantage," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 23(8), pages 1238-1261, December.
    2. Lei Wen & Haiwen Zhou, 2020. "Technology Choice, Financial Sector and Economic Integration Under the Presence of Efficiency Wages," Open Economies Review, Springer, vol. 31(1), pages 95-112, February.
    3. Binglin Gong & Haiwen Zhou, 2023. "The choice of technology and international trade," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 32(7), pages 1035-1057, October.
    4. Lei Wen & Haiwen Zhou, 2012. "Financial and Product Market Integration under Increasing Returns to Scale," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 38(1), pages 18-36.

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