Equilibrium Features of Imperfect Competition in the Deposit Market of Banking Sector

This paper endeavors to investigate the potential role of deposit market structure as a distinct channel for (monetary, fiscal, and regulatory) policy transmission mechanisms. In doing so, we have developed the core idea in a rational expectations partial equilibrium setup incorporating the possible contagion risks in the banking system. This has enabled us to achieve more sensible analytical findings within a tractable structure capable of making diverse equilibria observed in some empirical evidence. The setup/paper lays down conditions under which one could expect Nash equilibria, involving "limited price war," "deposit rates rat race," "bank run," and "systemic banking crisis" followed by incidents of "banking panic." The multiplicity of equilibria results from the interactions between the deposit market structural characteristics and policy commands due to externalities originating from strategic complementarity/substitution among the rival banks in the market. Further, the paper explores the allocation and stabilization efficiency implications in terms of conceivable equilibria for deposit rates, deposit market share, expected net returns, expected markup, and the expected level of effort of banks operating in the banking system with an emphasis on the role of equity capital in between.