*This paper is a revised version of part of my PhD dissertation. I thank my advisors Fabio Ghironi, Peter Ireland and Fabio Schiantarelli for their invaluable guidance. Ingela Alger, Mark Bils, Stephen Bond, Luisa Lambertini, Nobuhiro Kiyotaki, Hideo Konishi, Todd Prono, Julio Rotemberg, Richard Tresch, Benn Steil (the editor), two anonymous referees and seminar participants at the Atlanta Fed, New York Fed, Ninth World Congress of the Econometric Society, Boston College, U. de la Plata, UCEMA, U. T. Di Tella, U. de San Andrés provided helpful suggestions. M. Laurel Graefe provided superb research assistantship. Beyond the usual disclaimer, I must note that any views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.
Business Cycles and the Role of Imperfect Competition in the Banking System*
Article first published online: 3 APR 2011
© 2011 Blackwell Publishing Ltd
Volume 14, Issue 1, pages 103–133, Spring 2011
How to Cite
Mandelman, F. S. (2011), Business Cycles and the Role of Imperfect Competition in the Banking System. International Finance, 14: 103–133. doi: 10.1111/j.1468-2362.2011.01278.x
- Issue published online: 28 APR 2011
- Article first published online: 3 APR 2011
This study shows that the entry of new competitors in the banking system tends to occur during economic expansions. In addition, it provides evidence that established banks react by lowering the interest rates that borrowers pay, thus reducing bank system profits. In contrast, banks are able to sustain higher bank profit margins during recessions. These findings suggest that this pricing strategy is aimed at deterring the entry of new bank competitors into highly segmented regional retail niches. Consequently, monopolistic banking not only creates an inefficient wedge between lenders and borrowers but, as credit becomes cheaper in booms and more expensive during recessions, it further contributes to macroeconomic volatility. Empirical evidence for 124 countries and a general equilibrium model suitable to quantify the welfare losses of this monopolistic framework are provided.