Banks and the State-Dependent Effects of Monetary Policy

Martin Eichenbaum, Federico Puglisi, Sergio Rebelo and Mathias Trabandt

No 33523, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that the response of banks’ net interest margin (NIM) to monetary policy shocks is state dependent. Following a period of low (high) Federal Funds rates, a contractionary monetary policy shock leads to an increase (decrease) in NIM. Aggregate economic activity exhibits a similar state-dependent pattern. To explain these dynamics, we develop a banking model in which social interactions influence households’ attentiveness to deposit interest rates. We embed that framework within a nonlinear heterogeneous-agent NK model. The estimated model accounts well quantitatively for our key empirical findings.

JEL-codes: E44 (search for similar items in EconPapers)
Date: 2025-02
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
Note: EFG
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