Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation
75 Pages Posted: 9 Oct 2017 Last revised: 17 Jan 2020
Date Written: November 11, 2018
We quantify the impact of bank market power on the transmission of monetary policy through banks to borrowers. Using data from U.S. banks, we estimate a dynamic banking model in which monetary policy affects banks' funding costs. In the model, imperfectly competitive banks, facing capital and reserve regulations, optimally choose the degree to which they pass these cost shifts to borrowers and depositors. We find that in the last two decades, bank market power explains a significant portion of the transmission of monetary policy to borrowers. The quantitative effect is comparable in magnitude to the effect of bank capital regulation. We estimate that 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: Monetary policy transmission, banking competition, regulatory constraints
JEL Classification: E51, E52, G21, G28
Suggested Citation: Suggested Citation