Bank Competition and Monetary Policy in Sweden

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: This study focuses on how the level of competition in the Swedish mortgage banking industry affects the monetary policy through the transmission mechanism. The level of competition on the Swedish banking market is measured by the use of the Herfindahl-Hirschman Index, which is a structural competition model, and by the use of Panzar-Rosse’s H-statistic, a non-structural competition model. The level of competition is found to be closer to perfect competition than to a monopoly market. It is also found that the correlation between concentration and competition is extremely low, why it is concluded that structural and non-structural measures are used to measure quite different things. There is theoretical divergence whether monetary policy transmission is affected by the degree of bank competition. Time series data is used to test if the monetary policy transmission in Sweden is affected by degree of competition on the domestic banking market. Two different approaches are applied: first, the correlation between the time series of monetary policy shocks and the H-statistics is analyzed. Secondly, bank lending is regressed on the interaction of monetary policy shocks and bank competition. Monetary policy shocks are measured through a VAR-model. The shocks for the variables bank lending, GDP, money supply and the price level are regressed against the H-statistics to find out if the monetary policy transmission into the real economy is affected by the level of bank competition on the Swedish market. None of the approaches suggest that the state of bank competition has had an impact on the transmission of monetary policy over the years 1997-2007.

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