Monetary Policy and the Behavior of a Monopolistic Bank: A Theoretical Approach

Abstract

This paper investigates the influence of monetary policy on the optimal behavior of a monopolistic bank. More specifically, we discuss how the overdraft rate and the minimum reserve requirements affect the equilibrium values of lending rate and deposit rate as well as the corresponding quantities, when there is only one commercial bank in the economy and the Central Bank. Moreover, we examine the impact of these changes on the magnitude of the spread between the equilibrium rates. It is demonstrated that monetary policy via the overdraft rate does not affect the spread, while the effect of a change in the fraction of the minimum reserve requirements differs depending on the case.