Market concentration, credit institutions and the macroeconomy

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Abstract

Chapter one
is
a
brief discussion
of a few
methodological
premises.
The second chapter
is
meant to show
(by
means of a theoretical
analysis)
the effective macroeconomic relevance of oligopsony
in the market
for
credit.
This is done by
using two models. In the first
(simplified) model -
where the behaviour
of the supply
function
of
bank credit to industrial firms is
captured by
a
"Cobb-Douglas"
reduced form
-
an exogenous
decrease in the market power of the
industrial firms on the credit market
increases the effectiveness of
monetary policy.
In the second model, where the banking
sector
behaves consistently with the portfolio allocation theory, the results
are weakened:
it is
still true that,
apart from
extreme cases,
reductions
in the market power of industrial firms in the credit
markets
increase the macroeconomic level
of
investment
and
affect the monetary policy multiplier,
but the sign of the latter effect
becomes ambiguous and
depends
on the
analytical forms
of the
behavioural functions. Both models,
however,
show that
modifications of
the market structure
in the banking
sector have, in
general,
macroeconomic effects.
The third chapter suggests an
interpretation
of the phenomenon of
“securitization" on the basis
of Williamson's [1985]
contractual
framework. It is pointed out that in
securitized financial
systems
substitutability
between securities and intermediated
credit
is
an
empirically relevant phenomenon that
makes the demand for bank credit
to industry more unstable
than the
supply. For this purpose, a
comparative econometric analysis
has been
performed with
British and
German data, because the two countries had (apart from the
phenomenon of securitization) many similarities in their regulatory
systems, as well as
in the degree
of concentration of their banking sectors
and
in the magnitude of the respective economies, at
least
until German Unification.
The analytical
form
of the bank
credit supply function is based on
the "credit view".
This specific aspect of the behaviour
of
banks is
analyzed
in Chapter 4,
which contains an empirical analysis
(performed with
Italian data)
of the free liquidity
ratio
for
commercial
banks, interpreted
on the basis
of the recent
literature on
investment decisions
under conditions of
investments'
irreversibility and uncertainty.
Chapters 5
and
6
examine the interactions between industrial firms
and
financial intermediaries in
a
"microeconomic"
perspective. The
focus is
on the investment decision,
and one of the main
concerns
is to perform a theoretical and empirical analysis on the
connections
between risk, cost of capital and
investment decisions.
Chapter 5 contains an empirical analysis of the firms'
investment
decision based
on a theoretical
model where the decisions
concerning
investment and the firms' financial
structure are
taken
simultaneously.
The results are not conclusive, in
part
because of the
complexity of the causal links
among market structure,
investment and
financing decisions
suggested by various
contributions
in finance
as well as in industrial
economics.
The study of such causal
links is
precisely the concern of
Chapter 6,
which contains an analysis of the implications
of a
few
alternative
hypotheses (based
on precise results of the industrial
economics
literature)
on the link
existing between the cost of capital,
the market structure and the profit margins.

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