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

Wang, Yifei; Whited, Toni M.; Wu, Yufeng; Xiao, Kairong

doi:10.3386/w27258

Cited by 49 publications

(42 citation statements)

References 4 publications

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“…For the analysis in the main text, we assume that banks engage in a Cournot competition in the deposit market, but the lending market is perfectly competitive. We choose to focus on this structure because there is stronger evidence of imperfect competition in the deposit market than in the loan market (Dreschler et al, 2017;Wang et al, 2018). In Appendix B, we extend the model to the case where the lending market also features imperfect competition.…”

Section: Environmentmentioning

confidence: 99%

Central Bank Digital Currency and Banking

et al. 2019

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One frequently raised concern about a central bank digital currency (CBDC) is that it is likely to compete with bank deposits as a means of payment and therefore increase private banks' funding costs and induce disintermediation. We develop a micro-founded general equilibrium model with money and banking to evaluate this concern both theoretically and quantitatively. We find that when banks have market powers in the deposit market, introducing a CBDC that competes with bank deposits as a means of payment can compel banks to raise the deposit rate and expand bank intermediation and output. The model calibrated to the U.S. economy suggests that a CBDC with a proper interest rate can raise bank lending by 3.55% and output by 0.50%. We also use the framework to evaluate other dimensions of the CBDC design, including acceptability, eligibility as reserves and the rule of supply, and assess the role of a CBDC as the economy becomes increasingly cashless.

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Section: Environmentmentioning

confidence: 99%

Central Bank Digital Currency and Banking

et al. 2019

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“…This pass-through is at the core of existing views of the (multiform) bank lending channel of monetary policy. Classical views emphasized the role of reserves or bank capital, while recent views have argued that banks' market power or loan covenants are quantitatively important (Drechsler, Savov, and Schnabl, 2017;Wang, Whited, Wu, and Xiao, 2018;Greenwald, 2019). Independent of their exact nature, because they rely on bank-related frictions, all these views suggest the pass-through should be smaller for bond-dependent firms.…”

Section: Stock Price Reaction To Monetary Policymentioning

confidence: 99%

“…Two canonical class of explanations have difficulty to rationalize this finding. The first relates to the (multiform) bank lending channel, often phrased in terms of an interest rate pass-through to borrowers (Wang, Whited, Wu, and Xiao, 2018). Because banks are levered intermediaries issuing liquid deposits to fund illiquid loans, they are affected by monetary policy in specific ways.…”

Section: Introductionmentioning

confidence: 99%

The Bond Lending Channel of Monetary Policy

2019

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An increasing share of firms' borrowing occurs through bond markets. We present high-frequency evidence from the Eurozone that bond-reliant firms are more responsive to monetary shocks: in contrast to standard bank lending channel predictions, unexpected ECB policy changes affect their stock prices by more, even conditional on total debt and industry fixed-effects. We develop an organizing framework to decompose the stock price, credit risk and investment response of large firms. We emphasize the role of corporate liquidity management: firms react to rate hikes by being prudent in good times, reducing investment in favor of hoarding liquid assets. Since bond financing is less flexible in bad times than relationship banking, this effect can rationalize why the mix of bank and bond financing matters for monetary transmission. A mitigating force is that bonds generally have longer duration and lower interest-rate pass-through relative to loans. Our findings suggest that the recent global growth in bond debt following quantitative easing could interact with conventional interest rate policy going forward.

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“…To my knowledge, this is the first paper that develops banking models with nonunitary pass-through that contain a continuum of banks and monopoly power. Papers like Drechsler et al (2017), Wang et al (2019), Kurlat (2019), or Balloch and Koby (2019) have developed models where the pass-through of the policy rate to the deposit rate in normal territory can differ from one. Certain parametrizations of those models can produce a deposit pass-through in the 0.5 to 0.6 range.…”

Section: Introductionmentioning

confidence: 99%

Alternative Models of Interest Rate Pass-Through in Normal and Negative Territory

Ulate¹

2020

ERWP

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In the aftermath of the Great Recession, many countries used low or negative policy rates to stimulate the economy. These policies gave rise to a rapidly growing literature that seeks to understand and quantify their impact. A fundamental step when studying the effectiveness of low and negative policy rates is to understand their transmission to loan and deposit rates. This paper proposes two models of pass-through from policy rates to loan and deposit rates that can match important stylized facts while remaining parsimonious. These models can be used to study the transition between positive and negative policy rates and to quantify the impact of negative rates on banks.

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

Abstract: NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Cited by 49 publications

References 4 publications

Central Bank Digital Currency and Banking

Central Bank Digital Currency and Banking

The Bond Lending Channel of Monetary Policy

Alternative Models of Interest Rate Pass-Through in Normal and Negative Territory

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