A New Approach to Measure the Transmission Mechanism of Monetary Policy in the Intrinsic Value of Banks

Abstract

This paper investigates the transmission channels of monetary policy in the economy. Therefore, an economic and financial simulation model was developed based on the five main valuation models to estimate the intrinsic value of the five largest Brazilian banks as basic interest rates vary. This approach, in short, attempts to complement the traditional analysis of the transmission mechanism through the asset price channel by considering the intrinsic value channel of assets. The results show that the impact of these changes on the banking sector does not tend to affect its intrinsic values negatively. In fact, in most situations, banks increase their intrinsic value with lower base interest rates and lose very little intrinsic value when those rates rise. These findings demystify the notion that the main Brazilian banks prefer a macroeconomic environment with high basic interest rates and are useful to policymakers, investors, and other economic agents.