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FIRMS' ENDOGENOUS ENTRY AND MONOPOLISTIC BANKING IN A DSGE MODEL

Published online by Cambridge University Press:  30 January 2018

Carla La Croce  and
Lorenza Rossi
Carla La Croce
Affiliation:
University of Pavia
Lorenza Rossi*
Affiliation:
University of Pavia
*
Address correspondence to: Lorenza Rossi, Department of Economics and Management, University of Pavia, via San Felice al Monastero, 5, 27100 Pavia, Italy; e-mail: [email protected].
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Abstract

We consider a DSGE model with monopolistically competitive banks together with endogenous firms' entry. We find that our model implies higher volatilities of both real and financial variables than those implied by a dynamic stochastic general equilibrium (DSGE) model with a monopolistic banking sector and a fixed number of firms. The response of the economic activity is also more persistent in response to all shocks. Furthermore, we show that inefficient banks enhance the endogenous propagation of the shocks with respect to a model where banks compete under perfect competition and can fully ensure against the risk of firms' default.

Keywords

Firms' Endogenous EntryFirms' DynamicsMonopolistic BankingInefficient Financial Markets
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Special Issue 1: Current Macroeconomic Challenges , January 2018 , pp. 153 - 171
Copyright
Copyright © Cambridge University Press 2018 

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Footnotes

We thank Alice Albonico, Guido Ascari, Giovanni Di Bartolomeno, Stefano Fasani, Salvatore Nisticò, and Patrizio Tirelli for their helpful comments and suggestions. We are also grateful to all the participants of the workshop on “Macro Banking and Finance” held at the University of Milano “Bicocca” in September 2013, the workshop on “Macroeconomics, Financial Frictions and Asset Prices,” held at the University of Pavia in October 2013, and the Riccardo Faini–CEIS seminar, University of Tor Vergata. The authors are particularly grateful to Lilia Cavallari for her helpful discussion of the paper presented at the workshop on “Current Macroeconomic Challenges” held at the University “La Sapienza” in March 2014.

References

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