Date Added: Dec 2009
In this paper, the authors examine the impact of competition in the banking industry on financial market activity. In particular, they explore this issue in a setting where banks simultaneously insure individuals against liquidity risk and offer loans to promote intertemporal consumption smoothing. In addition, spatial separation and private information generate a transactions role for money. Interestingly, they demonstrate that the industrial organization of the financial system bears significant implications for the effects of monetary policy. Under perfect competition, higher rates of money growth lead to lower interest rates and a higher volume of lending activity. In contrast, in a monopoly banking sector, money growth restricts the availability of funds and raises the cost of borrowing.