Bank competition and transmission of monetary policy

This study investigates whether the transmission of monetary policy depends on the degree of competition in the banking sector. Applying an interacted panel VAR methodology consisting of a panel of 23 advanced economies, we find that GDP and credit respond less strongly to monetary policy shocks in economies where the bank market is more concentrated. We use the Lerner Index as a measure of banking competition and find evidence - albeit less clear - that monetary policy transmission is stronger when the banking sector is more competitive.1