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