Vol. 16 Núm. 93 (2026): Expansionary Balance Sheet Policies and Banking Competition: Implications for Credit Markets

The 2007-2009 financial crisis forced central banks around the world to resort to unconventional policy instruments. A noticeable example was the unprecedented expansion in the size of their balance sheets through the purchase of government securities. At the same time, the market concentration in the banking systems of major economies accelerated. In this paper, I analyze the implications of competition in the banking sector for the ability of expansionary balance sheet policies to affect credit market activity. Our results suggest that under perfectly competitive banks, increased rates of money growth reduce interest rates and increase loan volume. This also holds in high debt economies if the crowding out effect of government debt is low. Similarly, central bank bond purchases unambiguously promote credit market activity. In contrast, under a monopoly bank, higher rates of money growth reduce funding costs and promote lending except for when the opportunity cost of money is low, and liquidity shocks are of considerable magnitude.