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

YIFEI WANG; Toni M. Whited; Yufeng Wu; Kairong Xiao

doi:10.1111/jofi.13159

Journal of Finance Vol. 77 No. 4 2022

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

YIFEI WANG^{1,2,3,4,5,6,7,8,9,10,11}; Toni M. Whited^{1,2,3,4,5,6,7,8,9,10,11}; Yufeng Wu ^{1,2,3,4,5,6,7,8,9,10,11}; Kairong Xiao^{1,2,3,4,5,6,7,8,9,10,11}

¹ National Bureau of Economic Research · ² Harvard University · ³ Johns Hopkins University · ⁴ University of Illinois Urbana-Champaign · ⁵ Georgetown University · ⁶ University of Michigan–Ann Arbor · ⁷ Federal Reserve Board of Governors · ⁸ Instituto de Física Teórica · ⁹ Federal Reserve Bank of New York · ¹⁰ Columbia University · ¹¹ University of Hong Kong

Abstract

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.

DOI: 10.1111/jofi.13159
Volume: 77
Issue: 4
Pages: 2093-2141
Language: en
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Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation

Abstract

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