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Banks and the State-Dependent Effects of Monetary Policy

Author

Listed:
  • Martin S. Eichenbaum
  • Federico Puglisi
  • Sergio Rebelo
  • Mathias Trabandt

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

  • Martin S. Eichenbaum & Federico Puglisi & Sergio Rebelo & Mathias Trabandt, 2025. "Banks and the State-Dependent Effects of Monetary Policy," NBER Working Papers 33523, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33523
    Note: EFG
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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