This paper analyzes the implications of the gradual rise in bank concentration since the 1990s for the transmission of monetary policy. I use branch-level data on deposit and loan rates to evaluate the monetary policy pass-through conditional on the level of local bank concentration and bank capitalization. I find that banks operating in high-concentration markets and under-capitalized banks adjust short-term lending rates more. I then build a theoretical model with heterogeneous banks that rationalizes the empirical findings and explains the underlying mechanism. In the model, monopolistic competition in local deposit and loan markets, along with bank capital requirements, lead to frictions on the pass-through to the real economy. Counterfactual analyses highlight that the rise in bank concentration alters monetary policy pass-through by two channels: the market power and capital allocation channels. Both channels further strengthen monetary policy transmission to output and investment, amplify the credit cycle, and flatten the Phillips curve.
Presented at: European Central Bank, Board of Governors of the Federal Reserve, Banco Central de Chile, CEBRA annual meeting 2020, 2nd Workshop ``Women in Macro, Finance and Economic History'' (WIMFEH), 15th Economics Graduate Students' Conference (EGSC), University of Würzburg, 20th Annual FDIC/JFSR Bank Research Conference, SNDE 2022, Christian-Albrecht University of Kiel, IE University, Bank of England, LMU Munich, Norges Bank, Fairfield University, De Nederlandsche Bank, TU Dortmund, WU Vienna, Miami University, Federal Reserve Bank of Philadelphia, EEA Milano, MEG 2022, SNDE Symposium for Young Researchers, 4th EMMMC, CEPR Workshop Empirical Monetary Economics 2022, CRC Workshop "Global Crises, Financial Markets and the Role of Monetary Policy", EWMES 2022, 1st XAmsterdam Macroeconomic Workshop, University of Bonn.
This paper uses a new survey approach to empirically characterize the dynamics of pass-through at the firm level and explores them in a price-setting model. We directly elicit price pass-through of cost shocks, both in the field and in survey experiments. We find gradual pass-through dynamics due to infrequent adjustments (nominal rigidities) and high costs of deviating from competitors’ prices (micro real rigidities), especially when the shock is expected to be less persistent. The experiments provide direct causal evidence for micro real rigidities: Firms raise prices several times in response to a permanent aggregate shock, and idiosyncratic shocks of the same size have a lower pass-through than aggregate shocks. Further, our approach enables us to compute the slope of the Phillips curve, which decreases by half once allowing for micro real rigidities. Finally, we quantify the role of real and nominal rigidities in a general equilibrium price-setting model based on our empirical results and find a substantial degree of both.
Presented at: Banque de France, 13th ifo Conference on Macroeconomics and Survey Data, ifo Venice Summer Institute, Lisbon Macro Workshop, Verein für Socialpolitik, 30th CEPR European Summer Symposium in International Macroeconomics (ESSIM), LMU Munich
The recent surge in inflation led many unions and firms to alter their bargaining and wage-setting policies. Using novel German firm-level survey data, we document the extent of state dependence in wage setting across firms and workers during periods of high and low inflation. We find state dependence along the extensive and intensivemargins: the average duration of wage agreements shortens from 14.2 to 12.9 months, and the adjustment per pay round increases from 2-4% to 4-6%. We complement these findings with newly compiled union-level panel data on collective bargaining outcomes. We show that the observed state dependence can be rationalized in menu cost and Calvo models of wage-setting with heterogeneous firms. Finally, we examine the implications of state-dependent wage setting for the transmission of shocks and the slope of the Phillips curve in an otherwise standard New Keynesian model.
Presented at: Bavarian Macro Day, University of Graz, LMU Munich, 13th ifo Conference on Macroeconomics and Survey Data, Verein für Socialpolitik, ifo Instiute, FAU/IAB, NBB Workshop on Macroeconomics and Survey Data, NOeG WU Winter Workshop 2023.
- Monetary Policy Interactions: The Policy Rate, Asset Purchases, and Optimal Policy with an Interest Rate Peg (with R. Mau and J. Rawls, revise and resubmit) [CESifo WP'23]
We study monetary policy in a New Keynesian model with a variable credit spread and scope for central bank asset purchases to matter. A novel financial and labor market interaction generates an endogenous cost-push channel in the Phillips curve and a credit wedge in the IS curve. The ``divine coincidence" holds with the nominal short-term rate and central bank balance sheet available as policy tools. Credit spread-targeting balance sheet policy provides a determinate equilibrium with a fixed policy rate. This policy induces similar welfare losses relative to dual-instrument policy as inflation-targeting interest rate policy with a fixed balance sheet.
Presented at: I-85 Macroeconomics Workshop, Midwest Macro Spring 2022, Bank of Canada, ASSA 2022 Annual Meeting (poster session), LMU Munich, University of Notre Dame.
SELECTED WORK IN PROGRESS:
- Monetary Policy, Bank Rate Pass-Through, and Income Source (with J. Pandolfo) [draft coming soon]
We present evidence on banks' market power in payment services and relate this to monetary policy transmission through deposit rates. Banks with market power in payment services not only charge higher fees for their service but also offer lower deposit rates with less pass-through from monetary policy shocks. We propose a model where banks use product tying for deposits and payment services: banks leverage market power in payment services to exert pricing power in deposit rates. Thus, deposit rates and fees are linked, and pass-through depends on the extent of market power on both sides. We leverage our model to discuss the implications of these findings for monetary transmission mechanisms and financial stability.
This paper presents new evidence that the global rise in corporate saving across major advanced economies over the last two decades is driven by large firms. Their rapid growth in gross profits as a share of corporate value added, coupled with sluggish growth in dividend payment, has been the main source for the differential change in saving rates between large and small firms. We develop a model where liquidity constraints and financial frictions amplify exogenous heterogeneity across firms. We illustrate how the trend decline in the global real interest rate can rationalize the observed pattern of rising granularity in corporate savings, as larger and less constrained firms are better able to exploit more profitable investment opportunities. These firms, in turn, grow more rapidly, endogenously causing higher concentration within industries.