Monetary Policy Transmission under Different Banking Structures: The Role of Capital and Heterogeneity

23 Pages Posted: 11 Mar 2008

See all articles by Angelo S. Baglioni

Angelo S. Baglioni

Catholic University of the Sacred Heart of Milan

Abstract

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

Baglioni, Angelo, Monetary Policy Transmission under Different Banking Structures: The Role of Capital and Heterogeneity. International Review of Economics & Finance, Vol. 16, pp. 78-100, 2007. Available at SSRN: https://ssrn.com/abstract=1103910

Angelo Baglioni (Contact Author)

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, n.1
Milano, 20123
Italy
390272344024 (Phone)
390272342781 (Fax)

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