ریسک نقدینگی و رقابت مالی: مفاهیمی برای قیمت دارایی ها و سیاست های پولی

This paper studies the implications of banking competition for capital markets and monetary policy. In particular, I develop a two-sector monetary growth model in which a group of agents is exposed to liquidity shocks and money is essential. Banks insure depositors against such risk and invest in the economy's assets. In this setting, I compare an economy with a perfectly competitive banking sector to an economy with a fully concentrated financial sector. Unlike previous work, banks can have market power in both deposits and capital markets. Compared to a perfectly competitive financial sector, I demonstrate that a monopolistic banking system can have substantial adverse consequences on capital formation, assets prices, and the degree of risk sharing. Furthermore, multiple steady-states can emerge and the economy becomes subject to poverty traps. More importantly, market power in financial markets may overturn the Tobin effect present under a perfectly competitive financial sector. This necessarily happens in economies with high degrees of liquidity risk and low levels of capital formation.

The financial sector in general and the banking sector in particular around the globe have been subject to a large wave of consolidations in the past three decades.1 Recent events in financial markets have only served to speed up this process in the United States and Europe.2 As the number of financial institutions declines, the degree of competition may be altered, which raises concerns of policy makers. Specifically, this trend in financial markets raises two primary questions: how does the market structure of the banking system affect capital markets and the amount of insurance provided by the banking sector? More importantly, do the effects of monetary policy depend on the industrial organization of the banking sector? The second question is of significant importance because the effects of monetary policy hinge on the way the banking sector reacts to price changes.3 If banks are price setters in financial markets, they might behave differently relative to a competitive banking sector. The objective of this manuscript is to develop a framework that can shed some light on these issues. In particular, I examine a two-period overlapping generations economy that has two production sectors: a capital goods sector and a consumer goods sector. The economy is inhabited by three types of agents: capital producers, depositors, and bankers. Following Townsend (1987), agents are born on one of two geographically separated locations or islands. Private information and limited communication prevent credit from flowing across islands. Money overcomes these trade frictions and it is the only asset that can cross locations. Furthermore, there is a government that adopts a constant money growth rule and rebates its seigniorage income to young depositors in the form of lump-sum transfers. After trade takes place, a fraction of young depositors is randomly chosen to relocate to the other location. Because money is the only asset that can cross locations, agents must liquidate all their belongings into currency.4 As in Schreft and Smith (1997), financial intermediaries or bankers completely diversify idiosyncratic shocks. Therefore, all savings are intermediated.5 In addition to holding cash reserves, banks purchase capital goods, which they rent to consumer goods firms in the subsequent period. In order to examine the implications of banking structure, I compare two economies. In one economy, the banking sector is perfectly competitive, while in the other, the financial system is fully concentrated.6 Although few, if any, banks operate in either pure monopoly or perfectly competitive environments, comparing these two extreme cases sheds some light on how the degree of competition affects capital markets and interacts with monetary policy.7,8 To begin, I assume that banks enter competitively in deposits and capital markets. Thus, they make their portfolio choice to maximize the expected utility of their depositors. Under a technical condition, a steady-state exists and is unique. Additionally, a higher rate of money creation promotes capital formation. Intuitively, inflation raises depositors’ savings through higher transfers, which expands banks’ ability to invest in asset markets. The higher demand for new equipment raises their price and lowers their yield. I proceed by studying the behavior of an economy in which the banking sector is fully concentrated. In contrast to previous work such as Williamson (1986), the bank has market power in both deposit and capital markets. In this manner, the banker extracts all surplus from deposit markets. Further, the bank is a monopsonist in the market for new equipment and a monopolist in the rental market for capital. Because the bank has market power in financial markets, it has an incentive to restrict investment activity to lower asset prices and raise the return from capital. Therefore, an imperfectly competitive financial sector can have significant adverse consequences on capital markets. Additionally, market power in the market for deposits can lead to a low level of insurance against liquidity risk relative to a competitive banking sector. As I demonstrate in the text, this necessarily happens when the level of total factor productivity is below some threshold level. Moreover, market power in banking is a source of multiplicity of equilibria. In particular, there can be either a unique steady-state or two steady-states. Specifically, multiple steady-states arise when agents’ degree of exposure to liquidity risk is significant. Because market power can lead to multiplicity of equilibria, the economy is subject to poverty traps. That is, the economy could end up with a significantly low level of investment and inefficiently low asset prices. In contrast to the economy with a perfectly competitive banking sector, the effects of monetary policy depend on the degree of liquidity risk in the economy and the extent of economic development. When the banking sector is concentrated, inflation affects the economy through two primary channels. First, a higher rate of money creation raises deposits through higher transfers. This enables the bank to expand its portfolio and to increase capital investment. Furthermore, inflation affects the amount of insurance the bank is willing to provide. In particular, a higher rate of money growth reduces the return to relocated agents. Because the banker extracts all the surplus from deposit markets, a higher inflation rate encourages him to hold a more liquid portfolio. Therefore, inflation hampers capital formation through this channel. When the need for liquidity is not too significant, the steady-state is unique and the impact of inflation through government rebates dominates. Consequently, a higher rate of money creation raises investment activity as under a perfectly banking system. The higher amount of capital formation raises the price of capital and reduces its rental rate. Therefore, inflation adversely affects the return to capital. By comparison, two steady-state equilibria may exist when the degree of liquidity risk is significant. In the steady-state with a high capital stock, the return to capital is relatively low and the bank is allocating a large fraction of its deposits into capital investment. More importantly, the banker is providing a good amount of insurance against relocation shocks. As the bank is holding a highly illiquid portfolio, it is able to avoid the inflation tax by receiving transfers from the government. Consequently, inflation raises the level of investment in physical capital. Conversely, when the level of capital formation is small, the bank is holding a highly liquid portfolio to insure its depositors against liquidity risk. Despite that, the bank is providing its depositors with a very low level insurance. Consequently, a higher rate of money creation causes the bank to allocate more resources towards cash reserves and less into capital. In this manner, inflation also causes asset prices to decline and the return to capital to increase. Notably, the results under a monopolistic banking system are consistent with previous studies that find a non-monotonic relationship between inflation and the economy. Specifically, it is widely believed that the long-run effects of inflation are non-linear. Previous studies such as Azariadis and Smith (1996) and Huybens and Smith (1999) attribute such non-linearities to private information. For instance, Azariadis and Smith demonstrate that in a perfectly competitive banking sector, high levels of inflation can exacerbate information frictions and impede capital formation. By comparison, Huybens and Smith (1999) show that multiple steady-states can emerge under perfect competition with costly state verification problem. As in this manuscript the effects of monetary policy are not symmetric across steady-states. This manuscript complements these studies by highlighting imperfect financial competition as another source of inefficiency that can generate a non-monotonic relationship between inflation and the real economy.9 1.1. Related literature A large literature examines the impact of banking competition on financial market activity.10 However, only very few papers study its implications for monetary policy. For example, using an overlapping-generations endowment economy, Williamson (1986) demonstrates that monetary policy is not superneutral when banks have market power. In particular, inflation promotes credit market activity. While banks have market power in credit markets, deposit markets are perfectly competitive in his setting. By comparison, Boyd et al. (2004) consider an environment in which financial intermediaries provide risk sharing services to their depositors. Their primary focus is on the effects of the industrial organization of banks on liquidity crises. They demonstrate that banking crises are more likely to occur under a perfectly competitive financial system in high inflation environments. In contrast to Williamson (1986), banks have market power in deposit markets. However, banks face an exogenous rate of return to investment projects. Furthermore, Paal et al. (2005) develop an one sector monetary growth model to study the impact of banking competition on economic growth. As in Boyd et al. (2004), banks have market power in deposit markets. However, capital markets are perfectly competitive. In such a setting, profit maximizing banks seek to economize on cash holdings because it is dominated in rate of return—a growth enhancing effect. In addition, market power in deposits market has adverse consequences on savings and growth. While the effects of market power on growth are ambiguous, their model always predicts the presence of a Tobin effect. My work is also related to a recent study by Ghossoub et al. (2012). Ghossoub et al. (2012) demonstrate that monetary policy can exhibit a reverse-Tobin effect under a monopolist banking system. As in Williamson (1986), they consider an endowment economy and focus on credit market activity. In contrast to the previous studies discussed above, I develop a two-sector production economy in which banks have market power in both deposits and capital markets. This renders the bank a multi-product monopolist, which has important consequences for economic activity and monetary policy. In particular, I demonstrate that simultaneous market power in deposit and capital markets can be a source of multiplicity of equilibria and may give rise to development traps. Furthermore, inflation can have significant adverse effects in economies with high degrees of liquidity risk and low levels of development. The paper is organized as follows. In Section 2, I describe the model and examine the outcome in each production sector and explain the behavior of depositors. Section 3 studies an economy with a perfectly competitive banking sector. By comparison, I analyze an economy with a fully concentrated banking sector in Section 4. I offer concluding remarks in Section 5. Most of the technical details are presented in Appendix

The number of financial institutions around the world has significantly declined in the past two decades. For instance, the number of commercial banks has declined by one-half between 1990 and 2009 in the United States alone. If this trend continues, it could have significant adverse consequences on the degree of competition in the financial system. This raises two primary questions: how does the lack of financial sector competition affect capital markets and the amount of insurance provided by the banking sector? More importantly, does market power have any implications for monetary policy? In order to shed some light on these issues, I develop a two-sector overlapping generations model in which a group of agents is exposed to liquidity shocks. Bankers insure depositors against such risk and invest in the economy's assets. Following Boyd et al. (2004), I compare an economy with a perfectly competitive banking sector to an economy with a fully concentrated financial sector. Specifically, unlike previous work such as Williamson (1986), banks have market power in deposits and capital markets. I demonstrate that imperfect financial competition can generate a number of unfavorable outcomes. First, it could hamper capital formation and lower asset prices. Second, market power in deposit markets can lead to an inefficiently low amount of insurance. Third, multiple steady-states can emerge under a monopoly bank and the economy becomes subject to poverty traps. Finally, if market power significantly reduces capital formation, it may overturn the Tobin effect present under a perfectly competitive financial sector. This necessarily happens when agents are highly exposed to liquidity risk. While this manuscript only considers two special cases of banking structure, the analysis provided in this paper can be extended to be more in line with reality. This can be done by allowing Cournot–Nash competition in capital and deposit markets. The interaction between banking concentration and monetary policy can be studied by either treating the number of banks as exogenous as in Boyd and De Nicoló (2005) or by endogenizing the number of banks as in Williamson (1986) and Bonaccorsi di Patti and Dell'Ariccia (2004). By allowing endogenous entry of financial intermediaries, monetary policy can have significant implications for the degree of banking competition and capital markets. By comparison, treating the number of banks as exogenous enables us to examine the direct impact of the extent of banking concentration for monetary policy and asset markets. I intend to address these issues in upcoming work.