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Banks and the Marginal Propensity to Lend in General Equilibrium

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  • Angel Fernández Rojas

    (Banco Central de Reserva del Perú.)

Abstract

This paper examines the role of the marginal propensity to lend (MPL) out of deposit shocks in the transmission of monetary policy within a general equilibrium framework. To this end, I extend a standard New Keynesian DSGE model by incorporating banks and imperfect substitution between deposits and wholesale funding. Using U.S. bank-level data for calibration, I find that increasing financial frictions—raising the aggregate MPL by 66%—amplifies the responses of bank lending and investment to monetary shocks by 11% and 16%, respectively. Moreover, when the sensitivity of the marginal cost of funds also rises, loan pass-through increases by 20%, further amplifying lending and investment responses by 31% and 54%, respectively. Finally, higher MPLs amplify the production response to monetary shocks only in the medium run, through their impact on investment.

Suggested Citation

  • Angel Fernández Rojas, 2025. "Banks and the Marginal Propensity to Lend in General Equilibrium," Working Papers 2025-023, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2025-023
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