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Monetary Policy Transmission, Bank Market Power, and Wholesale Funding Reliance

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  • Amina Enkhbold

Abstract

I study the impact of banking market concentration and wholesale funding reliance on the transmission of monetary policy shocks to mortgage rates. I empirically demonstrate that in the United States, banks with higher reliance on wholesale funding in concentrated (competitive) deposit markets transmit monetary policy shocks less (more) to mortgage rates. I study this imperfect transmission through the lens of a New Keynesian model with monopolistically competitive banks and costly access to wholesale funding. I find that high market power banks with greater wholesale funding transmit monetary policy less to deposit rates, generating lower liability. This leads to lower mortgage lending, house prices, and borrower consumption. If monetary policy shocks become persistent, this negative effect is amplified with banks shifting away from deposits more towards wholesale funding.

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  • Amina Enkhbold, 2023. "Monetary Policy Transmission, Bank Market Power, and Wholesale Funding Reliance," Staff Working Papers 23-35, Bank of Canada.
    • Handle: RePEc:bca:bocawp:23-35
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    1. Amina Enkhbold, 2024. "Monetary Policy Transmission Through Shadow and Traditional Banks," Staff Working Papers 24-8, Bank of Canada.

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    More about this item

    Keywords

    Financial institutions; Inflation targets; Monetary policy transmission; Wholesale funding;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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