Monopolistic Pricing in the Banking Industry: a Dynamic Model

Monopolistic Pricing in the Banking Industry:
a Dynamic Model *

Enzo Diat

May 2004

Abstract

This work develops a portfolio model of the banking firm where both the size and compo-
sition of the portfolio are jointly determined. The model provides a micro-foundation of the
credit channel of transmission of monetary policy. It allows to analise the pricing policies of
the banking firm, and shows how interest rate shocks and credit quality shocks (the real shocks
that change expected default costs) affect the equilibrium level of loans and deposits. Besides
it shows the factors affecting the provision of insurance services by means of the smoothing of
shocks.

* I would like to thank Jacques Melitz, Andrew Hughes Hallett, Guido Ascari and John Ireland for many useful
comments and suggestions.

tUniversita degli studi di Milano Bicocca e University of Strathclyde. E mail: [email protected]

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