Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation
90 Pages Posted: 9 Oct 2017 Last revised: 1 Jun 2020
Date Written: November 11, 2018
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: Monetary policy transmission, banking competition, regulatory constraints
JEL Classification: E51, E52, G21, G28
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