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Economics Research International
Volume 2012 (2012), Article ID 961316, 4 pages
Research Article

Oligopolistic Banks, Bounded Rationality, and the Credit Cycle

Department of Economics, University of Erfurt, Nordhäuser Straße 63, PF 900 221, 99105 Erfurt, Germany

Received 29 March 2012; Accepted 20 June 2012

Academic Editor: Raouf Boucekkine

Copyright © 2012 Tobias F. Rötheli. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


This paper studies how boundedly rational default expectations affect the credit cycle. I propose a simple model of oligopolistic bank competition which serves to compare situations with just a portion of boundedly rational banks to situations where either all banks are rational or all banks are boundedly rational. When all banks are boundedly rational, the credit cycle is most amplified relative to the situation where all banks are rational. However, the amplifying effect of bounded rationality on the side of banks largely remains even when only a portion of banks are boundedly rational. Hence, the interest rate decisions of a minority of boundedly rational banks induce the more rational competitors to aggravate the credit cycle.