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HBANK: Monetary Policy with Heterogeneous Banks

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  • Bellifemine, Marco
  • Jamilov, Rustam
  • Monacelli, Tommaso

Abstract

We revisit the bank lending channel of monetary policy transmission in a Heterogeneous-Bank New Keynesian (HBANK) model with endogenous bank default risk. Using a sufficient-statistic approach, we show that the combination of banks' heterogeneity in the marginal propensity to lend and costly insolvency amplifies the real effects of monetary policy shocks. The central bank faces a trade-off between macroeconomic and financial stability: contractionary monetary policy shrinks bank net worth, raising the aggregate probability and resource cost of default. Addressing persistent inflationary pressure comes at the price of exacerbating financial fragility. Automatic \textit{micro-}prudential regulation---targeting only the top quartile of banks---effectively mitigates the macroeconomic-financial stabilization trade-off. We provide empirical evidence supporting the heterogeneous effects of monetary policy on bank assets and insolvency, reinforcing the necessity of incorporating bank-level heterogeneity in monetary policy design

Suggested Citation

  • Bellifemine, Marco & Jamilov, Rustam & Monacelli, Tommaso, 2022. "HBANK: Monetary Policy with Heterogeneous Banks," CEPR Discussion Papers 17129, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:17129
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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