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 movement 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.