Essays on Monetary Policy Transmission

In my dissertation, I study how financial frictions and market power in the banking sector affect the transmission of monetary policy shocks to mortgage rates and the real economy. The first chapter investigates how banking market concentration and its reliance on wholesale funding can affect the transmission of monetary policy shocks to mortgage rates. Using US bank- and loan-level data, I find that banks at the 90th percentile of the wholesale funding reliance in concentrated markets transmit 61 basis points (bps) to mortgage rates, in response to a monetary policy shock that raises the policy rate by 100 bps. Banks at the 10th percentile of the wholesale funding reliance in competitive markets transmit 108 bps to mortgage rates. I find that for unconventional monetary policy shocks, such as an increase in 10-year Treasury yield by 3.85 bps, high market power banks transmit 0.15 to 0.69 bps less to mortgage rates, whereas high market power FinTech lenders pass-through 2 to 3.36 bp more relative to their counterparts. The second chapter focuses on the macroeconomic implications of imperfect monetary policy transmission to mortgage rates. I build a quantitative New Keynesian model with monopolistically competitive banks that have costly access to wholesale funding. In contrast to assuming a perfectly competitive banking sector, my model exhibits a dampened transmission of monetary policy on output, consumption, and housing prices. I then study monetary policy transmission under the Basel III Liquidity Coverage Ratio rule that limits excessive reliance on wholesale funding. I find that higher market power banks with greater reliance on wholesale funding respond strongly to monetary tightening on mortgage rates. The third chapter analyzes cross-country monetary policy transmission on mortgage and deposit rates via the bank market power channel. My results show that when the policy rate increases by 100 bps, banks with high market power transmit a 49 bps lower deposit rate and a 20 bps higher mortgage rate relative to banks with low market power. Monetary policy decisions are transmitted to mortgage and deposit rates mainly through banks with low market power.Ph.D