Monetary Policy Transmission under Different Banking Structures: The Role of Capital and Heterogeneity
23 Pages Posted: 11 Mar 2008
This work deals with the transmission of monetary policy through the bank loan market, in presence of a capital requirement regulation. Unlike standard models, based on the "representative bank" shortcut, we adopt the heterogeneous agents approach: this allows us to explicitly model the strategic interaction between well-capitalized and under-capitalized banks. The main results are the following. (I) The propagation of a monetary policy impulse through the loan market differs considerably, depending on the market structure: under monopolistic competition, strategic complementarity among well-capitalized banks leads to a "multiplier effect"; in the Cournot oligopoly framework, an effect of the opposite sign is at work, due to strategic substitutability. (II) Well-capitalized banks are more important, in shaping the adjustment following a monetary policy shock, than what is implied by their relative number over total; this fact strengthens the monetary policy effectiveness. This result holds under both monopolistic competition and oligopoly, although the interaction among banks, leading to such a result, differs across the two banking structures.
Keywords: monetary policy transmission, banking, market structure, capital regulation, strategic interaction, heterogeneity
JEL Classification: G21, E51-52, D43
Suggested Citation: Suggested Citation