Banks and the State-Dependent Effects of Monetary Policy
Martin S. Eichenbaum, Federico Puglisi, Sergio Rebelo, Mathias Trabandt
NBER Working Papers,
No. 33523,
2025
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.
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