Do public banks reduce monetary policy power? Evidence from Brazil based on state dependent local projections (2000–2018)

We test the hypothesis that public banks reduce monetary policy power. Previous studies have shown that companies with access to government-driven credit present smaller fall in investment and production after a contractionary monetary policy shock. Nevertheless, these studies are based on microeconomic data and ignore macroeconomic effects, especially the cost-push effects, of monetary policy. We employ state-dependent local projections to compare monetary policy power – the sensibility of inflation to changes in policy interest rate – between periods of high credit of public banks and periods of high credit of private banks. We do not find evidence that monetary policy is less powerful in periods of high credit of public banks. Even though periods of high credit of public banks present a lower effect over output, those periods present less persistent price puzzles than periods of high private credit. Robustness of results is enhanced by performing several tests. We attribute our results to lower flexibility in interest rates of credit from public banks, what leads to lower transmission in financial costs, lower reduction in capital stock and lower variation in the exchange rate.