The Deposits Channel of Monetary Policy: A Quantitative Assessment

We embed a banking sector with deposit market power into a macroeconomic model to quantify the deposits channel of monetary policy.

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Yang Liu (University of Hong Kong)

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IWH, conference room and via Zoom

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Yang Liu is an Associate Professor of Finance at The University of Hong Kong. His research interests span asset pricing, macro-finance, and international finance.

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We embed a banking sector with deposit market power into a macroeconomic model to quantify the deposits channel of monetary policy. When interest rates increase, banks raise deposit rates less than one-for-one and deposits flow out of the banking system, leading to contraction in lending and real economic activities. The calibrated model shows that deposits channel amplifies the real effect of monetary policy by 100%. The model can replicate the salient features of banks’ response to monetary policy shocks, such as changes in deposit spreads, net interest margin, deposit volume, asset, net worth, franchise value. This channel is distinct from the bank balance sheet channel, which implies counterfactually large drops of bank net worth and franchise value in response to rate hikes.