Public banks and monetary policy: theory and some results based on state dependent local projections

Abstract

We test the hypothesis that public banks reduce monetary policy power for
Brazilian economy, during the 2000-2018 period. Previous studies have shown that
companies with access to government driven credit present smaller fall in investment and
production after a contractionary monetary policy shock. Nevertheless, these studies are
based on microeconomic data and ignore cost-push effects of monetary policy. We employ
state dependent local projections (Jordà, 2005) to compare monetary policy power (defined
as the sensibility of inflation to changes in basic interest rate) between periods of high credit
of public banks and periods of high credit of private banks. We do not find evidence that
monetary policy is less powerful in periods of high credit of public banks. Even though
periods of high credit of public banks present a lower effect over output, those periods
present less persistent price puzzles than periods of high private credit. We conduct several
robustness tests to confirm our results. We attribute those results to lower flexibility in
interest rates of credit from public banks, what leads to lower transmission in financial costs,
lower reduction in capital stock and lower puzzle in exchange rate.

JEL Classification: E5; E51; E58; E63.