Working Paper: NBER ID: w27258
Authors: Yifei Wang; Toni M. Whited; Yufeng Wu; Kairong Xiao
Abstract: We quantify the impact of bank market power on monetary policy transmission through banks to borrowers. We estimate a dynamic banking model in which monetary policy affects imperfectly competitive banks’ funding costs. Banks optimize the pass-through of these costs to borrowers and depositors, while facing capital and reserve regulation. We find that bank market power explains much of the transmission of monetary policy to borrowers, with an effect comparable to that of bank capital regulation. When the federal funds rate falls below 0.9%, market power interacts with bank capital regulation to produce a reversal of the effect of monetary policy.
Keywords: Bank Market Power; Monetary Policy Transmission; Structural Estimation
JEL Codes: E51; E52; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| federal funds rate very low (E43) | further cuts can be contractionary (E62) |
| bank market power (G21) | monetary policy transmission (F42) |
| bank capital regulation (G28) | monetary policy transmission (F42) |
| bank market power + capital regulation (G18) | monetary policy transmission (F42) |
| federal funds rate < 0.9% (E43) | market power + capital regulation interaction (G18) |
| bank market power + external financial market access costs (G21) | lending decisions (G21) |
| sensitivity of lending to policy rate (E43) | size of banks (G21) |