Public banks and monetary policy: theory and some results based on state dependent local projections

We test the hypothesis that public banks reduce monetary policy power forBrazilian economy, during the 2000-2018 period. Previous studies have shown thatcompanies with access to government driven credit present smaller fall in investment andproduction after a contractionary monetary policy shock. Nevertheless, these studies arebased on microeconomic data and ignore cost-push effects of monetary policy. We employstate dependent local projections (Jordà, 2005) to compare monetary policy power (definedas the sensibility of inflation to changes in basic interest rate) between periods of high creditof public banks and periods of high credit of private banks. We do not find evidence thatmonetary policy is less powerful in periods of high credit of public banks. Even thoughperiods of high credit of public banks present a lower effect over output, those periodspresent less persistent price puzzles than periods of high private credit. We conduct severalrobustness tests to confirm our results. We attribute those results to lower flexibility ininterest rates of credit from public banks, what leads to lower transmission in financial costs,lower reduction in capital stock and lower puzzle in exchange rate. JEL Classification: E5; E51; E58; E63.