TARISHI MATSUOKA Monetary Policy and Banking Structure In this paper, I examine the differences in optimal monetary policy in various banking systems. In particular, I compare two monetary economies: one with a competitive banking system and the other with a monopolistic one. In addition, the optimality of the discount window policy is considered. It is shown that the Friedman rule is the optimal monetary policy in a monopolistic banking economy, and the zero-inflation policy is optimal in a competitive banking economy under appropriate parameters. In addition, the combination of the Friedman rule and the discount window policy can achieve efficient allocation in both banking systems. JEL codes: E42, E58, G21 Keywords: overlapping generations, spatial separation, competitive banks, monopoly bank, Friedman rule, discount window. BEGINNING WITH FRIEDMAN (1969), numerous theoretical stud- ies have been conducted on optimal monetary policy. A major goal of monetary policy analysis is to obtain the optimal policy rule. However, the entire body of theoretical literature on this policy considers economies with a competitive banking system or without any banking systems. Little attention has been paid to the question whether the industrial organization of the banking system is important for optimal monetary policy. Various kinds of banking systems exist worldwide. Some countries, such as the United States in the 1990s, have competitive banking systems, while others, such as Japan in the 1960s, have a highly monopolized banking system. The differences in banking systems across countries and over the years should be carefully studied in the field of macroeconomics. The objective of this study is to highlight the differences in the optimal monetary policies of various banking systems. Specifically, I compare two economies that are identical in all respects except for the degree of competition. In one economy, the banking system is competitive, whereas in the other, it is monopolistic. I then explore how competition in banking is relevant to discussions on optimal monetary policy. I would like to thank two anonymous referees and Akihisa Shibata for their helpful comments and suggestions. Of course, all errors are mine. This study is financially supported by the research fellowships of the Japan Society for the Promotion of Science for young scientists. TARISHI MATSUOKA is at the Japan Society for the Promotion of Science and Graduate School of Economics (E-mail: tarishi727@gmail.com). Received October 22, 2009; and accepted in revised form Accepted February 18, 2011. Journal of Money, Credit and Banking, Vol. 43, No. 6 (September 2011) C  2011 The Ohio State University