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Banks and the State-Dependent Effects of Monetary Policy

Author

Listed:
  • Eichenbaum, Martin
  • Trabandt, Mathias
  • Rebelo, Sergio
  • Puglisi, Federico

Abstract

We show that the response of banks’ net interest margin (NIM) to monetary policy shocks is state dependent. Following a period of low (high) Federal Funds rates, a contractionary monetary policy shock leads to an increase (decrease) in NIM. Aggregate economic activity exhibits a similar state-dependent pattern. To explain these dynamics, we develop a banking model in which social interactions influence households’ attentiveness to deposit interest rates. We embed that framework within a nonlinear heterogeneous-agent NK model. The estimated model accounts well quantitatively for our key empirical findings.

Suggested Citation

  • Eichenbaum, Martin & Trabandt, Mathias & Rebelo, Sergio & Puglisi, Federico, 2025. "Banks and the State-Dependent Effects of Monetary Policy," CEPR Discussion Papers 20247, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20247
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    File URL: https://cepr.org/publications/DP20247
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    More about this item

    JEL classification:

    • 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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