NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation

Yifei Wang, Toni M. Whited, Yufeng Wu, Kairong Xiao

NBER Working Paper No. 27258
Issued in May 2020
NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, Monetary Economics

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.

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Document Object Identifier (DOI): 10.3386/w27258

 
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