Working Paper: NBER ID: w31396
Authors: Kaiji Chen; Yiqing Xiao; Tao Zha
Abstract: In well-developed financial markets, wholesale funding comoves negatively with retail deposits in response to interest rate changes, thereby weakening monetary policy transmission. By contrast, our study finds that in economies such as China where deposit rate ceilings are regulated, (i) retail deposits and wholesale funding comove positively as the policy rate changes, and (ii) wholesale funding strengthens the transmission of the policy rate to bank lending. We develop a theoretical model underscoring the role of deposit market regulation for the impact of monetary policy on bank funding composition in the context of the world's largest emerging market economy.
Keywords: monetary policy; financial repression; wholesale funding; bank lending channel
JEL Codes: E02; E5; G11; G12; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial repression (G28) | positive comovement of retail deposits and wholesale funding (F65) |
| positive comovement of retail deposits and wholesale funding (F65) | transmission of monetary policy to bank loans (E52) |
| binding deposit rate ceilings (E43) | expand funding sources through wholesale funding (G23) |
| increase in banks' equity (G21) | relaxation of capital constraints (F32) |
| tightened capital constraints (F65) | decrease in wholesale funding (F65) |
| deposit rate ceilings (E43) | relationship between wholesale funding and retail deposits (G21) |
| liquidity regulations (G28) | hinder monetary policy transmission (E52) |