Equilibrium Imperfect Competition and Banking: Interest Pass Through and Optimal Policy

Title: Equilibrium Imperfect Competition and Banking: Interest Pass Through and Optimal Policy

Authors: Allen Head (Queen's University), Timothy Kam (ANU), Ieng-Man Ng (ANU)

Date: 22 July 2020. 1.30pm (AEST)

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To attend the seminar please use the Zoom linked below. No registration is required, but please use your full name and institution if possible.

https://uqz.zoom.us/j/92871434036

Format

• 60 minutes Zoom presentation (questions throughout are allowed if the speaker agrees so)
• 30 minutes of Q&A

Co-authors can answer clarification questions posed in the Q&A throughout the presentation. A moderator collects more substantive questions in the Q&A chat to be answered in the last 30 min of Q&A. During the Q&A time, participants can also raise their hand and pose live questions. Everybody will be muted, and all interactions with the speaker are going through the chat with the moderator. Abusive behaviour will not be tolerated.

These details are subject to change

Abstract: We construct a monetary model in which banks may be welfare improving or essential in markets where private securities cannot support exchange. Our setting encompasses one with Bertrand-pricing banks as one limit and one with a monopolistic bank as the other extreme. Banks have ex-post heterogenous loan-rate markups in response to noisy consumer search for credit lines. We can rationalize empirically observed dispersion in loan rates and bank markups. We provide a testable long-run prediction that loan markups are positively correlated with dispersion in the loan rates. Normatively, we show that banks need not always be essential. Their competitiveness depends on policy which affects the equilibrium market concentration and dispersion of loan rate markups. At empirically plausible low inflation rates, banks tend to exploit their intensive markup margins more. Banks may become essential if they have to compete harder to attract borrowers and if inflation is high enough. Our welfare analysis speaks to why policymakers in many low-inflation countries may, rightly, be concerned with market power in the banking sector. We close by studying optimal long-run interest-rate and tax policies designed to alleviate banking demand instabilities. Because of equilibrium banking market power, there is a role for commitment to redistributive fiscal instruments to supplement an inflation targeting policy.