Essays on Money, Banking and Market Power

Abstract

This thesis has four Chapters. Chapter 1 introduces this thesis. The remaining three Chapters (Chapter 2 - Chapter 4) are summarized as follows.

In Chapter 2, we develop a monetary model that rationalizes dispersion in loan-rate markups---for an identical loan product---as an equilibrium phenomenon. We corroborate the model's predictions with micro-level data for the United States. We provide new evidence, at national and state levels, of a positive (negative) relationship between the standard deviation (coefficient of variation) and the average in residual lending-rate markups. Equilibrium imperfect banking competition also creates a novel channel from monetary policy to loan-rate markups, and thus, to imperfect monetary-policy pass-through to real consumption outcomes. At low inflation, banks tend to extract higher markups from existing loan customers rather than compete for additional loans. As a result, banking activity need not be welfare-improving if inflation is sufficiently low. This result speaks to concerns regarding market power in the banking sectors of low-inflation countries. Normatively, under a given inflation target, welfare gains arise if a central bank can use additional liquidity-provision instruments to offset banks' market-power incentives.

In Chapter 3, we propose a deposits channel of monetary policy that works through an endogenous measure of average deposit-rate markdown. Despite there being a homogeneous deposit product, the average deposit-rate markdown depends on an empirically-relevant distribution of heterogeneous deposit rates. In turn, this distribution is an equilibrium object and depends directly on inflation or monetary policy.As anticipated inflation increases, the dispersion and interest-rate spread on deposits rise. These distort the liquidity value of trading in the frictional goods market. Since capital is a productive input in all markets, in a general equilibrium, market power in deposit taking distorts capital accumulation and long-run growth in an otherwise frictionless, neoclassical sector. We also show that competitive banking equilibrium allocations can be restored via an interest-bearing central bank digital currency that serves as an outside option. Our model provides an alternative theory that sheds new light on the deposits channel of monetary policy transmission. The new insight works through an empirically-consistent dispersion in deposit-rate markdowns.

In Chapter 4, we show that competitive banking amplifies firms' ability to extract higher markups from some ex-post heterogeneous buyers. This works through a new pecuniary-externality channel that is tightly connected to an equilibrium distribution of retail-goods price markups. Our model generates a positive relationship between the consumer credit-to-GDP ratio and retail price markups (and their dispersion). This prediction is consistent with empirical evidence using firm-level data in the United States. The endogeneity in firms' markup responses to the presence of credit renders competitive banking not always and everywhere a welfare-enhancing proposition. Consequently, the welfare-improving role of banking liquidity transformation is ambiguous. Our model also justifies why policymakers should be worried about rising industry markups. Show more