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

48 Pages Posted: 9 Oct 2017 Last revised: 10 Dec 2018

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

Date Written: November 18, 2018

Abstract

We quantify the impact of bank market power on the pass-through of monetary policy to borrowers. To this end, we estimate a dynamic banking model in which monetary tightening increases banks' funding costs. Given their market power, banks optimally choose how much of a rate increase to pass on to borrowers. In the model, banks are subject to capital and reserve regulations, which also influence the degree of pass-through. Compared with the conventional regulation-based channels, we find that in the two most recent decades, bank market power explains a significant portion of monetary transmission. The quantitative effect is comparable in magnitude to the bank capital channel. In addition, the market power channel interacts with the bank capital channel, and this interaction can reverse the effect of monetary policy when the Federal Funds rate is low.

Keywords: Monetary Policy Transmission, Banking Competition

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 18, 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 ( email )

3022 Broadway, Columbia Business School
822 Uris Hall
New York, NY NY 10027
United States
6467848927 (Phone)

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