Monetary Policy and Market Power in Banking

Applying a spatial competition model to banking, we analyze the effects of the choice of a monetary policy rule by the central bank on banks ’ market power as measured by the Lerner index. We show that a procyclical monetary policy may reinforce the countercyclical move-ment of the Lerner index. That is, this measure of competitiveness of the banking sector may vary more over the business cycle due to the monetary policy rule