The competitive structure of the banking industry, and the effects of monetary policy

My dissertation aims to demonstrate the effect of banking competition and the impact of monetary policy on financial market activity. The first essay seeks to examine the interactions between the degree of price competition and the effects of monetary policy. In comparing perfectly competitive banks to a monopoly bank, deposit rates respond to monetary policy in different ways. Moreover, the results show that, under perfect competition, expansionary monetary policy lowers interest rates to generate an increase in lending. In contrast, under a monopoly bank, higher growth rates of money raise interest rates on loans. The study concludes by illustrating the welfare costs of inflation under different degrees of competition.; The second essay demonstrates how the degree of financial competition in the credit market affects strategic interactions among banks. The results show that more competition leads to a higher volume of lending activity and lower interest rates. Interestingly, the nature of strategic behavior and the degree of entry bear significant implications for the effects of monetary policy. Specifically, in the presence of non-cooperative behavior and limited entry, monetary policy only affects the rate of return to money. In contrast, under endogenous entry, inflation discourages bank entry and exacerbates credit market frictions. In addition, when banks have the ability to collude, higher inflation further aggravates credit market imperfections. The analysis concludes by examining how public debt leads to additional distortions in the presence of imperfect competition.; The final essay introduces a formal model of the market for payments services. The results demonstrate that the degree of financial competition and the cost of processing transactions have a significant impact on transactions services activity. Furthermore, the paper also studies interactions between operating costs and the market structures. Interestingly, monetary policy has a significant impact on strategic behavior between financial institutions. That is, an increase in the degree of banking competition has a stronger impact in economies with high inflation rates. In contrast, an expansionary monetary policy weakens the impact of productivity improvements in the transactions services market.; Keywords. Financial Competition, Monetary Policy, Inflation, Strategic Behavior, Payments Services.