Money, Financial Instability and Stabilization Policy

Money, Financial Instability and Stabilization Policy

Edited by L. Randall Wray

Money, Financial Instability and Stabilization Policy consists of original articles by leading Post Keynesians, Kaleckians and other heterodox economists from the developed and developing world. Post Keynesian literature has long been associated with the study of money, financial markets and financial instability. Indeed, this is perhaps the area to which Post Keynesians have made the greatest contributions. The authors to this volume present an overview of the latest research on monetary theory and policy, financial markets, and financial instability coming out of the Post Keynesian school of thought. They provide an indication of the wide-ranging interests and of the truly international scope of Post Keynesian research. The first half of the volume is theoretical, while the second half includes papers that are either empirical or more focused on specific concerns.

Chapter 8: Mark-up Determinants and Effectiveness of Open Market Operations in an Oligopsonistic Banking Sector: The Mexican Case

Noemí Levy and Guadalupe Mántey

Subjects: development studies, development economics, economics and finance, development economics, post-keynesian economics

Extract

Noemí Levy and Guadalupe Mántey1 Introduction Endogenous money theorists usually assume commercial banks operate in oligopolistic competition, and set the loan rate by adding a mark-up to the Central Bank rate. They are divided on what determines the mark-up, particularly on the role of liquidity preference, and the resulting slope of the credit supply curve. The effect of the interest elasticity of deposits demand on loan rates has been neglected by Post Keynesian writers, because they emphasize that causality goes from credit to deposits, and also because financial deregulation and innovations have widened the possibilities for liability management. For the circuitists, even the concept of deposits demand is meaningless, since they conceive cash balances as a residual variable in the monetary circuit. Accordingly, deposit interest rates are often assumed to be determined by a mark-down of the interbank rate, while the size of the spread is conditioned by administrative costs of cheque accounts (Palley, 1994). In this chapter, we maintain that commercial banks have oligopsonistic power in their domestic deposit market which enables them to maximize profits by lowering deposit rates when the central bank raises the price of reserves, and banks aim to satisfy a trustworthy demand for credit. Various factors account for bankers’ oligopsony in the deposit market: first, bankers’ high degree of concentration, and scale economies, which favour collusive behaviour; second, their strategic position in the payments system, since they are able to create money; and finally, their convenient locations, which enable customers to lower transaction...

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