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Working Papers, No. 2022-41, September 2022 Crossref
Macro Shocks and Firm Dynamics with Oligopolistic Financial Intermediaries

(Revised June 2, 2025)

Motivated by a secular increase in the concentration of the U.S. banking industry, I develop a new macroeconomic model with oligopolistic financial intermediaries and heterogeneous firms. Market power allows banks to price discriminate and charge firm-specific markups, exerting stronger market power over productive firms that are more financially constrained. This dampens capital accumulation and amplifies the effects of macroeconomic shocks. During a crisis, banks exploit the higher number of financially constrained firms to extract higher markups, inducing a larger decline in real activity. When a big bank fails, the remaining banks use their increased market power to restrict credit supply, worsening and prolonging the downturn.


Working papers are not edited, and all opinions and errors are the responsibility of the author(s). The views expressed do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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