Discussion of “ Large Banks , Loan Rate Markup , and Monetary Policy ” ∗

Cuciniello and Signoretti (this issue, hereafter CS) provide a New Keynesian dynamic stochastic general equilibrium (NKDSGE) model with imperfect competition in the banking industry and collateral-constrained borrowers to address some important questions. How much does banking industry market structure amplify business cycles? How does strategic interaction between big banks and the central bank affect aggregate outcomes? The idea that bank market structure and real economic outcomes are connected is important, and I think the authors make a nice contribution to the literature. CS establish some interesting results. First, strategic interaction among a small number (n) of banks generates countercyclical loan markups which depend on (i) the elasticity of substitution between loan types ( ), firm leverage, and how the central bank responds to inflation (φπ) in its policy rule. Second, countercyclical markups amplify the transmission of monetary and technology shocks on the real economy, which is absent in the perfectly competitive case (i.e., constant markups when n → ∞). Third, the level of the spread is positively related to firm leverage (using the accounting measure of capital assets to net worth). Fourth, amplification of financial (or technology) shocks is weaker (stronger) the more aggressive the central bank’s response to inflation. There is substantial heterogeneity in the banking sector. First, bank market structure varies substantially across countries. For instance, in 2011, the asset market share of the top three banks in