Substantial research has been conducted on the direct effects of banking competition or lack thereof. However, little work has investigated how the market structure of banks can affect the transmission of monetary policy. The purpose of this paper is to investigate to what degree bank concentration dampens or enhances the response of manufacturing to monetary policy changes.
To test how back concentration affects the transmission of monetary policy onto manufacturing value-added, the author regresses real value-added in manufacturing on bank concentration, monetary policy and the interaction of these two variables. The data set consists of a panel of 22 OECD countries across 59 manufacturing sectors from 1993 to 2005.
The author finds that bank concentration has two distinct effects: growth in manufacturing is lower in countries with higher concentration and manufacturing is less responsive to monetary policy as well. A loosening of monetary policy by lowering interest rates has a significantly larger effect on growth in countries with lower banking concentration. Overall, a 1 per cent decrease in the monetary policy interest rate increases industrial growth by 0.049 per cent when the three-bank concentration ratio is equal to the sample average, but the same monetary policy change has roughly twice the effect if bank concentration is only 5 per cent lower, all else equal.
The author is the first to measure how bank concentration alters the effectiveness of monetary policy using real economic activity as the output variable. The study is one of very few that has tied together inefficiencies created by bank concentration and the transmission of monetary policy.
