Hampered Monetary Policy Transmission - A Supply-Side Story?

Abstract

This paper shows that the supply side of credit is a major factor for hampered monetary policy transmission in monopolistic banking markets. Our stress test data containing projected interest rates of all 1,555 small and medium-sized banks in Germany under two hypothetical scenarios provide a clear way to partial out demand shocks that are unrelated to monetary policy; we are thus able to show that while market power banks charge higher loan rates, they spare their borrowers a part of exogenous monetary policy contractions and withhold a substantial part of rising rates from their depositors. Because high market power banks are relatively more profitable, these banks could be able to insure their relationship customers against adverse shocks.