Liquidity Risk And Financial Competition: Implications On Asset Prices And Monetary Policy

Date Added: Jan 2010
Format: PDF

Recent events in financial markets have led to a substantial decline in the number of financial institutions, which may affect the extent of financial competition. What are the implications of such outcome on the degree of risk sharing, asset markets, and monetary policy? In order to answer these questions, the author develops a two-sector monetary growth in which money and financial institutions play important roles. Compared to a perfectly competitive financial sector, the author demonstrates that imperfect competition in deposits and capital markets can have substantial adverse consequences on capital formation, assets prices, and the degree of risk sharing.