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

YIFEI WANG, Toni M. Whited, Yufeng Wu, Kairong XiaoFinance金融中介UTD24

Journal of Finance2022-05-25University of Hong Kong; Instituto de Física Teórica; Georgetown University; National Bureau of Economic Research; University of Illinois Urbana-ChampaignDOI

Citations195

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.

Monetary policyMonetary economicsEconomicsMarket powerCredit channelCapital (architecture)Capital requirementReserve requirementBusinessFinancial systemInflation targetingCentral bank