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How does bank cost-efficiency affect the interest rate pass-through?

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  • Natalia ANDRIES

    (ERUDITE, Université Paris-Est)

  • Steve BILLON

    (LaRGE Research Center, Université de Strasbourg)

Abstract

This paper theoretically investigates the effect of bank cost-efficiency on the transmission of monetary policy impulses to bank lending rates. In a monopolistic competition setting that displays increasing marginal costs, we show that the distortion of the interest rate pass-through depends on the nature of the bank cost-efficiency shock. If banks increase their cost-efficiency on loan activities, the monetary policy transmission is strengthened. Instead, if banks experience an improvement in their cost-efficiency on deposit activities, the interest rate pass-through is weakened.

Suggested Citation

  • Natalia ANDRIES & Steve BILLON, 2024. "How does bank cost-efficiency affect the interest rate pass-through?," Working Papers of LaRGE Research Center 2024-04, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    • Handle: RePEc:lar:wpaper:2024-04
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    File URL: http://ifs.u-strasbg.fr/large/publications/2024/2024-04.pdf
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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