| My doctoral dissertation studies the effects of countercyclical bank markups on macroeconomic performance. The countercyclical pattern of bank markups constitutes a bank-supply channel that extends the credit channel to rein force the same vicious circle: Credit is more expensive during recessions, so that firms and households postpone investment and work decisions, thereby deepening the recession.; In the first chapter, I construct a bank balance-sheet data set across 124 countries for 1991-2000. I show that ex-post bank markups are strongly countercyclical, even after controlling for financial development, bank concentration, operational costs, inflation, and reverse causation.; The countercyclical pattern is explained by the highly pro-cyclical entry of foreign banks that occurs mostly at the wholesale level, and signals the intention to spread to the retail level. My hypothesis is that wholesale entry triggers incumbents' limit-pricing strategies aimed at deterring entry in retail niches that in turn reduce bank markups. In the second chapter, I develop a DSGE setup in which the modeling of the banking system captures several of the features of the data. I find that market power in the financial system increases the volatility of all real variables, amplifies the business cycle, and reduces welfare.; In the third chapter, I use a variant of the New Keynesian model for a SOE and add the bank-supply channel to the standard balance-sheet channel, which links the condition of the borrower balance sheets to the default risk and the external finance premium. I show that bank markup increments, as a consequence of sudden capital outflows, end up increasing borrowing costs for firms, as well as damaging the financial position of firms. The bank-supply channel helps to explain the relatively large investment volatility typically experienced in emerging economies. These conclusions are robust to different monetary regimes. Results hold even with floating exchange rates, slow pass-through, and liabilities fully denominated in local currency. |
