This paper examines the existence and magnitude of the deposits channel of monetary policy. Under a fairly general assumption that bank lending is increasing in bank deposits, the deposits channel exists if a policy rate cut leads to an increase in ba...
This paper examines the existence and magnitude of the deposits channel of monetary policy. Under a fairly general assumption that bank lending is increasing in bank deposits, the deposits channel exists if a policy rate cut leads to an increase in bank deposits. This paper theoretically shows that the deposits channel exists if the share of interest rate sensitive investment on bank’s total investment portfolio is small, deposits market is highly concentrated, or the share of demand deposits on total deposits is large. Also, using Korean bank-level data, this paper empirically finds that a 1%p decrease in policy rate leads to a 4% increase in bank lending through the deposits channel and this channel is more pronounced with demand deposits as opposed to term deposits.