Macroprudential and Monetary Policies with an Imperfectly Competitive Banking Sector

This paper studies the effect of bank competition on the optimal use of monetary and macroprudential policies. To this end, I develop a New Keynesian DSGE model with collateral constraints and an imperfect competitive banking sector. The results from the model demonstrate that the degree of competition in the banking sector has a sizable impact on the optimal mix of monetary and macroprudential policies. Specifically, the gains from a leaning-against-the-wind monetary policy are substantially smaller when the banking sector is less competitive. Results suggest that, from a policy perspective, monitoring the level of bank competition is crucial when the objective is to promote financial and economic stability.