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A Macroeconomic Theory of Banking Oligopoly

Author

Listed:
  • Stella Xiuhua Huangfu

    (University of Sydney)

  • Hongfei Sun

    (Queen's University)

  • Chenggang Zhou

    (University of Waterloo)

  • Mei Dong

    (University of Melbourne)

Abstract
We study the behavior and economic impact of oligopolistic banks in a tractable macro environment with solid micro-foundations for money and banking. Our model has three key features: (i) banks as oligopolists; (ii) liquidity constraint for banks that arises from mismatched timing of payments; and (iii) search frictions in credit, labor and goods markets. Our main ndings are: First, both bank prot and welfare react non-monotonically to the number of banks in equilibrium. Strategic interaction among banks may improve welfare as in standard Cournot competition. Nevertheless, competition among oligopolistic banks does not always improve welfare. As the number of banks rises, each bank has stronger marginal incentives to issue loans, yet each receives a smaller share of the aggregate demand deposit used to make loans. When the number is su¢ ciently high, banks become liquidity constrained in that the amount they lend is limited by the amount of deposits they can gather. In this case, welfare is dampened as banks are forced to reduce lending, which leads to fewer rms getting funded, higher unemployment, and thus ultimately lower output. Second, with entry to the banking sector, there may exist at most three equilibria of the following types: one is stable and Pareto dominates, another is unstable and ranks second in welfare, and the third is stable yet Pareto inferior. The number of banks is the lowest in the equilibrium that Pareto dominates. Finally, ination can change the nature of the equilibrium. Low ination promotes a unique good equilibrium, high ination cultivates a unique bad equilibrium, but medium ination can induce all three equilibria of the aforementioned types.

Suggested Citation

  • Stella Xiuhua Huangfu & Hongfei Sun & Chenggang Zhou & Mei Dong, 2017. "A Macroeconomic Theory of Banking Oligopoly," 2017 Meeting Papers 191, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:191
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    References listed on IDEAS

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    3. Altermatt, Lukas & Wang, Zijian, 2024. "Oligopoly banking, risky investment, and monetary policy," European Economic Review, Elsevier, vol. 164(C).
    4. Yerushalmi, Erez & Paladini, Stefania, 2023. "Blockchain in Financial Intermediation and Beyond: What are the Main Barriers for Widespread Adoption?," CAFE Working Papers 22, Centre for Accountancy, Finance and Economics (CAFE), Birmingham City Business School, Birmingham City University.
    5. Sholevar, Maryam & Harris, Laurence, 2019. "Mind the gap: A discussion paper on Financial Literacy, Financial behaviour and Financial Education : Is there any Gender Gap?," OSF Preprints b7zd6, Center for Open Science.
    6. Schneider, Andreas, 2020. "Credit cooperatives: Market structure, competition, and conduct. Exploring the case of Paraguay," MPRA Paper 102309, University Library of Munich, Germany.
    7. Choi, Michael & Rocheteau, Guillaume, 2023. "A model of retail banking and the deposits channel of monetary policy," Journal of Monetary Economics, Elsevier, vol. 139(C), pages 127-147.
    8. Kun Lv & Shurong Yu & Dian Fu & Jingwen Wang & Chencheng Wang & Junbai Pan, 2022. "The Impact of Financial Development and Green Finance on Regional Energy Intensity: New Evidence from 30 Chinese Provinces," Sustainability, MDPI, vol. 14(15), pages 1-29, July.

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    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • 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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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