Discussion paper

DP17129 HBANK: Monetary Policy with Heterogeneous Banks

We study how bank heterogeneity and market power shape the transmission of monetary policy. In the data, following a monetary contraction, large banks lower their credit mark-ups and quantities significantly more and raise their deposit mark-ups significantly less than small banks. We interpret our findings in a Heterogeneous Bank New Keynesian (HBANK) model, featuring permanent ("skill'') and stochastic ("luck'') bank returns heterogeneity, incomplete markets, variable asset and deposit market power, and nominal rigidities. In this setup, the aggregate effects of monetary policy shocks depend explicitly on the endogenous distribution of banks' net worth and the competitive structure of asset and deposit markets. Our main findings are three-fold. First, the model matches both the aggregate and the cross-sectional conditional responses to monetary policy shocks estimated from the data. Second, due to the marginal propensity to lend being increasing in profitability, permanent returns heterogeneity considerably strengthens the effectiveness of monetary policy shocks. Third, market power amplifies the effects of monetary policy shocks, whereas the opposite holds for deposit market power. This stems from credit mark-ups of large intermediaries being strongly conditionally pro-cyclical, while deposit mark-ups being counter-cyclical. When calibrated to U.S. bank-level data, the full model delivers substantial amplification of monetary shocks.


Bellifemine, M, R Jamilov and T Monacelli (2022), ‘DP17129 HBANK: Monetary Policy with Heterogeneous Banks‘, CEPR Discussion Paper No. 17129. CEPR Press, Paris & London. https://cepr.org/publications/dp17129