Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation

75 Pages Posted: 9 Oct 2017 Last revised: 17 Jan 2020

See all articles by Yifei Wang

Yifei Wang

University of Michigan, Department of Finance

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Yufeng Wu

University of Illinois at Urbana-Champaign - Department of Finance

Kairong Xiao

Columbia University - Columbia Business School

Date Written: November 11, 2018

Abstract

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

Wang, Yifei and Whited, Toni M. and Wu, Yufeng and Xiao, Kairong, Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation (November 11, 2018). Available at SSRN: https://ssrn.com/abstract=3049665 or http://dx.doi.org/10.2139/ssrn.3049665

Yifei Wang

University of Michigan, Department of Finance ( email )

Ann Arbor, MI
United States

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yufeng Wu (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://https://business.illinois.edu/profile/yufeng-wu2/

Kairong Xiao

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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