Monopolistic Pricing in the Banking Industry: a Dynamic Portfolio Model

Abstract

This work develops a portfolio model of the banking firm where both the size and composition of the portfolio are jointly determined. The model provides a quite simple micro-foundation of the credit channel of the transmission of monetary policy. It allows analysing 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.