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Imperfect bank competition, borrower adverse selection, and the transmission of monetary policy

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  • Miguel Cantillo

    (Universidad de Costa Rica)

Abstract

This paper studies bank competition with borrower adverse selection. In the model, expected non-performing loan costs are high when credit is granted in booms, when risk free rates are low, or when competition is strong. I prove that full competition is suboptimal due to this last effect; that more competition improves the transmission of monetary policy, and that lending rates are always pro-cyclical. The paper examines the relative plausibility of sequential and simultaneous bank competition. I show that with asymmetric costs, bank market shares are always inversely related to their efficiency, and that bank entry does not always lower lending rates.

Suggested Citation

  • Miguel Cantillo, 2023. "Imperfect bank competition, borrower adverse selection, and the transmission of monetary policy," Working Papers 202301, Universidad de Costa Rica, revised Mar 2023.
    • Handle: RePEc:fcr:wpaper:202301
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    References listed on IDEAS

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    Keywords

    Bank competition; transmission of monetary policy; Cournot competition; adverse selection in credit markets.;
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