| Abstract: | Applying a spatial competition model to banking, we analyze the effects of the choice of a monetary policy rule by the central bank on banks market power as measured by the Lerner index. We show that a procyclical monetary policy may reinforce the countercyclical movement of the Lerner index. That is, this measure of competitiveness of the banking sector may vary more over the business cycle due to the monetary policy rule.JEL classification: G21, E52, L13.Acknowledgements The author thanks Hans Degryse, Hans van Ees, Marco Haan, Eko Riyanto, Bert Schoonbeek, Elmer Sterken, three anonymous referees, and participants of the EARIE 2001 conference (Dublin), the NAKE Day 2002 (Amsterdam), and a seminar at Ghent University for their constructive comments.revised version received November 11, 2003 |
