Coordinated Effects in Monetary Policy
19 Pages Posted: 29 May 2018 Last revised: 18 Jun 2018
Date Written: June 1, 2018
Monetary policy affects the cost of capital, and thereby conditions for collusion in loan markets - which in turn influence the transmission of policy rates. Stronger countercyclical interest rate policy responses increase the scope for bank cartels on loan markets by decreasing the critical discount factor. At the same time, they affect the actual discount factor by (partial) pass-through of the marginal cost of banking in loan market rates. When down-turns occur sufficiently often, the combined effect is to increase the space for stable bank cartels. Monetary policy can instead constrain collusion in money markets if crises are infrequent, so that it increases the expected cost of capital. With a short-run policy rate decrease in down-turns that in size relative to the increase in up-turns is inversely related to the frequency of crises occurring, central banks can neutralize their policy's stimulus to bank cartels. Overshooting the mark in crises leaves countercyclical monetary policy conducive to collusion.
Keywords: banking, cartel, monetary policy, stability, interest rate
JEL Classification: D43, E52, G21
Suggested Citation: Suggested Citation