HBANK: Monetary Policy with Heterogeneous Banks

Marco Bellifemine, Rustam Jamilov and Tommaso Monacelli

No 17129, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We revisit the bank lending channel of monetary policy transmission in a Heterogeneous-Bank New Keynesian (HBANK) model with endogenous bank default risk. Using a sufficient-statistic approach, we show that the combination of banks' heterogeneity in the marginal propensity to lend and costly insolvency amplifies the real effects of monetary policy shocks. The central bank faces a trade-off between macroeconomic and financial stability: contractionary monetary policy shrinks bank net worth, raising the aggregate probability and resource cost of default. Addressing persistent inflationary pressure comes at the price of exacerbating financial fragility. Automatic \textit{micro-}prudential regulation---targeting only the top quartile of banks---effectively mitigates the macroeconomic-financial stabilization trade-off. We provide empirical evidence supporting the heterogeneous effects of monetary policy on bank assets and insolvency, reinforcing the necessity of incorporating bank-level heterogeneity in monetary policy design

Keywords: Monetary policy; Financial intermediation (search for similar items in EconPapers)
JEL-codes: E44 E51 E52 (search for similar items in EconPapers)
Date: 2022-03
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP17129 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:17129

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP17129

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().