Bank Market Structure and Monetary Control

Abstract

FINANCIAL INNOVATIONS AND REGULATORY ACTIONS together have acted to produce sweeping changes in the U.S. financial environment. Much of the recent literature in the area of money and banking has been concerned with the implications of these developments for monetary policy. However, one major aspect of this issue which has been relatively ignored is the relationship between the competitive structure of banking markets and the capability of the Federal Reserve to exercise control over its intermediate or ultimate policy goals. Given that deregulation of banking and various forms of financial innovations (e.g., technological innovations in the provision of financial services, the proliferation of various near-money financial assets, and the growth of nonbank financial intermediaries) have altered the competitive environment in banking, it seems clear that this relationship should be investigated. Two previous efforts to examine the monetary policy implications of different bank market structures are Aftalion and White (1977) and VanHoose (1983). In each of those papers, the short-run, real-sector effects of potential policy instruments under the structural extremes of perfect competition and monopoly are derived and contrasted. However, the analysis in each case is based upon models in which perfect certainty is assumed and no interactions are allowed between the real and

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