Essays on bank heterogeneity and monetary policy
Date
2024
DOI
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Version
OA Version
Citation
Abstract
In this dissertation, I study how bank heterogeneity and the marginal propensity to lend affect the transmission of monetary policy. In the first chapter, I develop a banking model with heterogeneous banks to study how heterogeneity in marginal propensities to lend and responses of deposits to monetary shocks affect the monetary transmission to bank lending. The marginal propensity to lend (MPL) measures how much lending increases after an idiosyncratic one unit increase in deposits. Banks face financial frictions to substitute deposits with wholesale funding, which exposes bank lending to idiosyncratic deposit shocks. When banks are heterogeneous in the degree of financial frictions they face, the aggregate response of bank lending to monetary shocks depends on a deposit heterogeneity channel, which comes from the covariance of MPLs and responses of deposits to monetary shocks. I use U.S. bank-level data to calibrate the model and I find that heterogeneity in the degree of financial frictions dampens monetary policy by at least 17%.
In the second chapter, I study how heterogeneity in the volatility of deposit withdrawal shocks affects the monetary transmission to bank lending. I develop a general equilibrium model where banks differ in their size and small banks are endowed with a riskier distribution of deposit withdrawal shocks, consistent with the data. In the model, small banks experience a larger decline in deposits and lending after an increase in the policy rate. Moreover, bank size heterogeneity dampens monetary policy. I use U.S. bank-level data and I find that banks at the 90th percentile of the withdrawal risk distribution reduce lending by an extra 1% and deposits by an extra 0.7-0.9% relative to banks at the 10th percentile after a monetary shock that raises the Fed funds rate by 100 basis points. Moreover, aggregate lending falls by 0.9% due to withdrawal risk.
In the third chapter, I study the role of MPLs in the transmission of monetary policy in a general equilibrium model. I incorporate banks into a standard New Keynesian DSGE model. Banks face frictions to substitute deposits with wholesale
funding. I use U.S. bank-level data to calibrate the model and I find that higher financial frictions that increase the aggregate MPL by 66% amplify the response of bank lending and investment to monetary shocks by 11% and 16%, respectively. Moreover, if the sensitivity of the marginal cost of funds also increases, the loan pass-through increases by 20%, which amplifies the response of bank lending and investment by 31% and 54%, respectively. Higher MPLs do not amplify the response of production in the short run but they do at longer horizons, due to the decline in investment.
Description
2024