Advertisement

Bank competition, real investments, and welfare

  • Oz Shy
  • Rune Stenbacka
Article
  • 57 Downloads

Abstract

We construct an overlapping generations growth model, where young consumers choose how to allocate resources among real investment (deposits), acquisition of bank ownership, and young-age consumption. At old age, consumers sell bank ownership and collect their bank deposits to support consumption. The model shows that an increase in banks’ market power stimulates bank profit and bank value, thereby raising the resources required for young consumers to acquire bank ownership. This causes a crowding-out effect on real investment, the magnitude of which is amplified with higher endowment growth rate and real investment return. Finally, we conduct a welfare analysis of the investment crowding-out effect.

Keywords

Investment crowding-out Size of the banking sector Deposit market competition Economic growth 

JEL Classification

G21 O41 

Notes

Acknowledgements

We are deeply indebted to two anonymous referees for their extensive guidance and proposed modifications that greatly improved this article. We also thank seminar participants at Tufts University and the Bank of Canada for valuable comments. Special thanks to Sofia Priazhkina and Maarten van Oordt for valuable suggestions. Rune Stenbacka acknowledges financial support from Suomen Arvopaperimarkkinoiden Edistamissaatio. The work on this project has started while Oz Shy was teaching at MIT Sloan School of Management.

References

  1. Arcand JL, Berkes E, Panizza U (2015) Too much finance? J Econ Growth 20(2):105–148CrossRefGoogle Scholar
  2. Cahuc P, Challe E (2012) Produce or speculate? Asset bubbles, occupational choice, and efficiency. Int Econ Rev 53(4):1105–1131CrossRefGoogle Scholar
  3. Carpenter S, Demiralp S (2010) Money, reserves, and the transmission of monetary policy: does the money multiplier exist?. Finance and economics discussion series. Federal Reserve Board, Washington, Discussion paper no. 2010–41Google Scholar
  4. Cecchetti S, Kharroubi E (2012) Reassessing the impact of finance on growth. BIS working paper no. 381Google Scholar
  5. Cecchetti S, Kharroubi E (2015) Why does financial sector growth crowd out real economic growth?. BIS working paper no. 490Google Scholar
  6. Chou C-F, Shy O (1991) An overlapping generations model of self-propelled growth. J Macroecon 13(3):511–521CrossRefGoogle Scholar
  7. Chou C, Shy O (1993) The crowding-out effects of long duration of patents. Rand J Econ 24(2):304–312CrossRefGoogle Scholar
  8. Farhi E, Tirole J (2011) Bubbly liquidity. Rev Econ Stud 79(2):678–706CrossRefGoogle Scholar
  9. Femminis G (2002) Monopolistic competition, dynamic inefficiency and asset bubbles. J Econ Dyn Control 26(6):985–1007CrossRefGoogle Scholar
  10. Gersbach H, Wenzelburger J (2008) Do risk premia protect against banking crises? Macroecon Dyn 12(S1):100–111CrossRefGoogle Scholar
  11. Gersbach H, Wenzelburger J (2011) Interest rate policies and stability of banking systems. In: Chadha J, Holly S (eds) Interest rates, prices and liquidity: lessons from the financial crisis, chap. 3. Cambridge University Press, Cambridge, pp 71–107CrossRefGoogle Scholar
  12. Jones L, Manuelli R (1992) Finite lifetimes and growth. J Econ Theory 58(2):171–197CrossRefGoogle Scholar
  13. Kay J (2015) Other people’s money: the real business of finance. PublicAffairs, New YorkGoogle Scholar
  14. Kehoe T (1989) Intertemporal general equilibrium models. In: Hahn F (ed) The economics of missing markets, information, and games. Oxford University Press, pp 363–393Google Scholar
  15. King M (2016) The end of alchemy: money, banking, and the future of the global economy. WW Norton and Company, New YorkGoogle Scholar
  16. Krainer R (2017) Economic stability under alternative banking systems: theory and policy. J Financ Stab 32:107–118CrossRefGoogle Scholar
  17. Laitner J (1982) Monopoly and long-run capital accumulation. Bell J Econ 13(1):143–157CrossRefGoogle Scholar
  18. Levine R (2005) Finance and growth: theory and evidence. In: Aghion P, Durlauf S (eds) Handbook of economic growth, chap 12, vol 1. Elsevier, New York, pp 865–934CrossRefGoogle Scholar
  19. Lucas R (1988) On the mechanics of economic development. J Monet Econ 22(1):3–42CrossRefGoogle Scholar
  20. Martin A, Ventura J (2012) Economic growth with bubbles. Am Econ Rev 102(6):3033–58CrossRefGoogle Scholar
  21. McCandless G, Wallace N (1991) Introduction to dynamic macroeconomic theory: an overlapping generations approach. Harvard University Press, CambridgeGoogle Scholar
  22. McLeay M, Amar R, Thomas R (2014) Money creation in the modern economy. Bank Engl Q Bull Q1:14–27Google Scholar
  23. Muller W, Woodford M (1988) Determinacy of equilibrium in stationary economies with both finite and infinite lived consumers. J Econ Theory 46(2):255–290CrossRefGoogle Scholar
  24. Philippon T (2010) Financiers versus engineers: should the financial sector be taxed or subsidized? Am Econ J Macroecon 2(3):158–182CrossRefGoogle Scholar
  25. Sen P (2002) Welfare-improving debt policy under monopolistic competition. J Econ Dyn Control 27(1):143–156CrossRefGoogle Scholar
  26. Shy O, Rune S (2017) An overlapping generations model of taxpayer bailout of banks. J Financ Stab 33:71–80CrossRefGoogle Scholar
  27. Henry S (1936) Rules versus authorities in monetary policy. J Polit Econ 44(1):1–30CrossRefGoogle Scholar
  28. Tirole J (1985) Asset bubbles and overlapping generations. Econometrica 53(6):1499–1528CrossRefGoogle Scholar
  29. Tobin J (1984) On the efficiency of the financial system. Lloyds Bank Rev 153:1–15Google Scholar

Copyright information

© Springer-Verlag GmbH Austria, part of Springer Nature 2018

Authors and Affiliations

  1. 1.NewtonUSA
  2. 2.Hanken School of EconomicsHelsinkiFinland

Personalised recommendations