Arbeitspapier

Credit misallocation and macro dynamics with oligopolistic financial intermediaries

Bank market power shapes firm investment and financing dynamics and hence affects the transmission of macroeconomic shocks. Motivated by a secular increase in the concentration of the US banking industry, I study bank market power through the lens of a dynamic general equilibrium model with oligopolistic banks and heterogeneous firms. The lack of competition allows banks to price discriminate and charge firm-specific markups in excess of default premia. In turn, the cross-sectional dispersion of markups amplifies the impact of macroeconomic shocks. During a crisis, banks exploit their market power to extract higher markups, inducing a larger decline in real activity. When a "big" (i.e., non-atomistic) bank fails, the remaining banks use their increased market power to control the supply of credit, worsening and prolonging the recession. The results suggest that bank market power could be an important concern when formulating appropriate bail-out polices.

Language
Englisch

Bibliographic citation
Series: Working Paper ; No. WP 2022-41

Classification
Wirtschaft
Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
Financial Markets and the Macroeconomy
Asset Pricing; Trading Volume; Bond Interest Rates
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Production, Pricing, and Market Structure; Size Distribution of Firms
Subject
Dynamic Financial Oligopoly
Endogenous Financial Markups
Heterogeneous Firms
Firm Dynamics
Micro-Founded Financial Frictions
Price Discrimination

Event
Geistige Schöpfung
(who)
Villa, Alessandro T.
Event
Veröffentlichung
(who)
Federal Reserve Bank of Chicago
(where)
Chicago, IL
(when)
2022

DOI
doi:10.21033/wp-2022-41
Handle
Last update
10.03.2025, 11:42 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Villa, Alessandro T.
  • Federal Reserve Bank of Chicago

Time of origin

  • 2022

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