Financial Technology and the Transmission of Monetary Policy: The Role of Social Networks

Abstract

Financial technology-based (FinTech) lending is expected to ease U.S. mortgage market frictions that have weakened the transmission of monetary policy to households. This paper establishes that social networks play a key role in consumers’ adoption of FinTech lending, which amplifies the effects of a monetary stimulus. I provide causal estimates of the network effect on FinTech adoption using county-level data. To quantify the role of FinTech lending and network spillovers in the transmission of monetary policy shocks, I build a heterogeneous-agent model with social learning. The model shows that the consumption response to a monetary stimulus is 13% higher in the presence of FinTech lending and network spillovers, and that about half of this improvement is accounted for by network spillovers.

Keywords: FinTech, network effects, monetary policy, mortgage, consumption, refinancing

JEL Classification: E21, E44, E52, G21, G23