In the wake of the Great Recession there is a general consensus that monetary easing is key to stimulating investment and to strengthening economic recovery. However, there is a widespread concern that monetary stimulus is not reaching all markets evenly. For example, the International Monetary Fund (IMF, 2012) argues that monetary easing is allowing large corporations to access capital at record low rates, while small ﬁrms are struggling to obtain bank loans. Along the same lines, the president of the Federal Reserve Bank of New York suggests that the recent purchases of mortgage backed securities by the Federal Reserve were not effective in lowering primary mortgage rates, in part, because banks increased their margins.
Motivated by such concerns, in this paper I tackle the idea that bank competition affects the transmission of monetary policy across markets. In particular, I analyze the speed and completeness of the pass-through of the monetary policy rate to bank lending rates, and provide evidence on the importance of bank competition to explain heterogeneity in the way banks react to monetary policy impulses, using a unique transaction-level data set that includes all corporate loans of every commercial bank in Mexico from 2005 to 2010. For this purpose, I develop a simple model of the banking ﬁrm and test its implications using dynamic panel data methods.