Template-Type: ReDIF-Paper 1.0
Title: Imperfect Banking Competition and the Propagation of Uncertainty Shocks
Author-Name: Tommaso Gasparini
Author-Email: tommaso.gasparini@students.uni-mannheim.de
Classification-JEL: E32, E44, G21, L13
Keywords: Financial Frictions, Financial Intermediaries, Heterogeneous Agents, Market
Power, Uncertainty

Abstract: Uncertainty shocks play a crucial role in driving business cycle fluctuations. This
paper investigates the impact of changes in banking competition on the propagation of
uncertainty shocks. Using a panel dataset of 44 countries, I show that lower banking
competition amplifies the negative impact of uncertainty on output growth. I further
explore this relationship through a dynamic stochastic general equilibrium model featuring
imperfect banking competition and financial frictions. The model shows that
lower banking competition leads to higher borrowing rates and increased risk-taking
by entrepreneurs. As a result, when the number of competitors is lower, uncertainty
shocks have a stronger negative impact on defaults, investment and output due to
increased risk-taking.

Note: 
Length: 58
Creation-Date: 2023-04
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp416
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2023_416