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

Yifei Wang, Toni Whited, Yufeng Wu and Kairong Xiao

No 27258, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E51 E52 G21 G28 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
Note: CF EFG ME
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Citations: View citations in EconPapers (29)

Published as YIFEI WANG & TONI M. WHITED & YUFENG WU & KAIRONG XIAO, 2022. "Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation," The Journal of Finance, vol 77(4), pages 2093-2141.

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Journal Article: Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation (2022)
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