QED Working Paper Number
1481

Using micro-level data for the U.S., we provide new evidence—at national and state levels—
of a positive (negative) relationship between the standard deviation (coefficient of variation)
and the average in bank lending-rate markups. In a quantitative theory consistent with these
empirical observations, banks’ lending market power is determined in equilibrium and is a novel
channel of monetary policy. At low inflation, banks tend to extract higher markups from existing
loan customers rather than competing for additional loans. As a result, banking activity need
not be welfare-improving if inflation is sufficiently low. This result speaks to concerns regarding
market power in the banking sectors of low-inflation countries. Normatively, under a given
inflation target, welfare gains arise if a central bank can use additional liquidity-provision (or
tax-and-transfer) instruments to offset banks’ market-power incentives

Author(s)
Sam Ng
Isaac Pan
JEL Codes
Keywords
Banking; Credit; Markup Dispersion; Market Power; Stabilization Policy; Liquidity
Working Paper