Bank market power and the risk channel of monetary policy

Elena Afanasyeva and Jochen Güntner

Journal of Monetary Economics, 2020, vol. 111, issue C, 118-134

Abstract: Do banks lend to riskier borrowers after a monetary expansion? We modify the classic costly state verification problem by introducing a risk-neutral monopolistic bank, which maximizes profits subject to borrowers’ participation. While the bank can diversify idiosyncratic default risk, it bears the aggregate risk. In partial equilibrium, the bank prefers a higher leverage ratio of the borrower, when the profitability of lending increases, e.g. after a monetary expansion. This risk channel persists in a New Keynesian DSGE model that replicates the conditional comovement in response to a monetary policy shock and the unconditional cross-correlations of bank-related variables in the data.

Keywords: Costly state verification; Lending standards; Monetary policy; Risk channel (search for similar items in EconPapers)
JEL-codes: D53 E44 E52 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (13)

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Working Paper: Bank Market Power and the Risk Channel of Monetary Policy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:111:y:2020:i:c:p:118-134

DOI: 10.1016/j.jmoneco.2019.01.029

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