Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation
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.
We would like to thank Harjoat Bhamra, Marco Bonomo, Yasser Boualam, Dean Corbae, Olivier Darmouni, Itamar Dreschler, Mark Egan, Brent Glover, Valentin Haddad, Ali Hortacsu, Frank de Jong, Erica Li, Gregor Mavtos, Patricia Mosser, Stijn van Nieuwerburgh, Neil Pearson, George Pennacchi, Alexi Savov, David Sraer, Olivier Wang, and Pavel Zryumov for their helpful comments and discussions. We also thank participants at the CICF, EFA, FIRS, the Chicago Booth Asset Pricing Conference, the Financial Innovation and Risk Management Conference, the FMA Wine Country Finance Conference, the FRBSF Conference on Advances in Financial Research, the Macro-Finance Society Workshop, the NBER Summer Institute, the Northeastern University Finance Conference, the RCFS Conference, the Short-Term Funding Markets Conference, the University of Connecticut Conference, the UBC Summer Conference, the Stanford Institute for Theoretical Economics (SITE) Summer Workshop, the SFS Cavalcade, and seminar participants at the Bank of Canada, Chicago Booth, Columbia University, CUHK, Georgetown University, Johns Hopkins University, Northwestern University, the FDIC, the Federal Reserve Bank of New York, the Federal Reserve Board, ITAM, INSPER, the University of Lausanne, the University of Michigan, the University of Rochester, UIUC, Wharton, Harvard University, MIT, and Wirtschaftsuniversitat Wien. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.