Does competition in the commercial banking sector affect local indeterminacy?

Abstract

The objective of this work is to assess whether imperfect competition in the commercial banking sector can be a source of instability and generate endogenous (expectation driven) uctuations in the economy. We study an overlapping generations model with two types of consumers (both having present and future consumption), endogenous labor, constant returns to scale in the nal good sector, and decreasing returns to scale in the capital accumulation technology. We analyze the local dynamic properties of the steady state regarding empirically relevant parameters, such as the elastic- ity of substitution and the mark-up factor on the banking sector. We are able to determine that, under perfect competition, the steady state is lo- cally determinate for standardly used empirical values for the parameters, or locally explosively divergent for more extreme values. Under imperfect competition, however, the steady state can become locally indeterminate for some intervals on either the elasticity of substitution or the mark-up factor.

Date of Award	16 May 2016
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Francesco Carli (Supervisor) & Teresa Lloyd-Braga (Co-Supervisor)