Working Paper: CEPR ID: DP15553
Authors: Rafael Repullo
Abstract: Drechsler, Savov, and Schnabl (2017) claim that increases in the monetary policy rate lead to reductions in bank deposits, which account for the negative effect on bank lending. This paper reviews their theoretical analysis, showing that the relationship between the policy rate and the equilibrium amount of deposits is in fact U-shaped. Then, it constructs an alternative model, based on a simple microfoundation for the households' demand for deposits, where an increase in the policy rate always increases the equilibrium amount of deposits. These results question the theoretical underpinnings of the "deposits channel" of monetary policy transmission.
Keywords: monetary policy; transmission; banks; market power; deposits channel
JEL Codes: E52; G21; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy rate (E52) | bank deposits (G21) |
| monetary policy rate (E52) | equilibrium amount of deposits (D53) |