HBANK: Monetary Policy with Heterogeneous Banks

Organised by

• Department of Economics

We study monetary and macroprudential policy transmission in a Heterogeneous Bank New Keynesian (HBANK) model by characterizing the general equilibrium macroeconomic response to policy shocks in sequence space. Novel, measurable sufficient statistics for this response are partial-equilibrium policy Jacobians and intertemporal marginal propensities to lend (iMPL). We show how ex-ante and ex-post bank heterogeneity - through their interaction with the iMPLs - impact the policy transmission mechanism. Each response is generically decomposed into direct and indirect effects. We find that direct effects generally account for 80%+ of the total response to any policy intervention. Models with bank heterogeneity create a net worth fluctuation problem, raise the partial-equilibrium sensitivity to policy changes, leading to aggregate amplification of both monetary and macroprudential policy shocks. We extend our framework with departures from perfect banking competition and apply it to the rise of banking concentration and the 2023 regional banking crisis.

Co-Authors: Marco Bellifemine (LSE), Tommaso Monacelli (Bocconi University)