Banks and the State-Dependent Effects of Monetary Policy

Martin Eichenbaum, Mathias Trabandt, Sergio Rebelo and Federico Puglisi

No 20247, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: 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: E52 G21 (search for similar items in EconPapers)
Date: 2025-05
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