Monetary Policy, Bank Heterogeneity and the Marginal Propensity to Lend

I study how bank heterogeneity affects the role of deposits in the monetary transmission to aggregate bank lending. I develop a banking model where banks face financial frictions to substitute deposits with wholesale funding, which exposes bank lending to idiosyncratic deposit shocks. When banks are heterogeneous in the degree of financial frictions they face, the aggregate response of bank lending to monetary shocks depends on a deposit heterogeneity channel, which comes from the covariance of marginal propensities to lend (MPLs) and responses of deposits to monetary shocks. I use U.S. bank-level data to calibrate the model and find that heterogeneity in the degree of financial frictions dampens monetary policy by at least 17%.