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Central Bank Liquidity Provision and Financial Sector Competition This paper presents a general equilibrium production economy where money is essential and financial intermediaries provide important economic functions. In this setting, we study the effects of liquidity provision by the monetary authority under two different banking structures: a perfectly competitive and a fully concentrated banking system. When the banking sector is perfectly competitive, liquidity injections through an open market purchase stimulate capital investment and production. Interestingly, an expansionary monetary policy can become contractionary when the banking sector is fully concentrated. This necessarily happens in economies where government liabilities constitute a large fraction of total deposits and inflation is high. Moreover, we demonstrate that imperfect banking competition is a source of indeterminacy of dynamical equilibria. More specifically, the economy can display Hopf bifurcation. However, monetary policy plays an important role in controlling deterministic cycles and endogenous volatility that could arise under a fully concentrated banking sector

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  • Hamid Beladi

    (University of Texas at San Antonio)

  • Edgar Ghossoub

    (University of Texas at San Antonio)

Abstract

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  • Hamid Beladi & Edgar Ghossoub, 2012. "Central Bank Liquidity Provision and Financial Sector Competition This paper presents a general equilibrium production economy where money is essential and financial intermediaries provide important e," Working Papers 0002, College of Business, University of Texas at San Antonio.
    • Handle: RePEc:tsa:wpaper:0009eco
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    References listed on IDEAS

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    6. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-162, May.
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    More about this item

    Keywords

    Monetary Policy; Open Market Operations; Banking Competition;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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