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

Author

Listed:
  • Edgar A. Ghossoub

    (UTSA)

  • Robert R. Reed

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

Suggested Citation

  • Edgar A. Ghossoub & Robert R. Reed, 2015. "Banking Competition, Production Externalities, and the Effects of Monetary Policy," Working Papers 0167eco, College of Business, University of Texas at San Antonio.
    • Handle: RePEc:tsa:wpaper:0167eco
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Banking Competition; Production Externality; Optimal Monetary Policy;
    All these keywords.

    JEL classification:

    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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