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The Rate Elasticity of Retail Deposits in the United Kingdom: A Macroeconomic Investigation

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  • Ching-Wai (Jeremy) Chiu

    (Bank of England)

  • John Hill

    (Bank of England)

Abstract

This paper quantitatively studies the behavior of major banks’ household deposit funding in the United Kingdom. We estimate a panel of Bayesian vector autoregression models on a unique data set compiled by the Bank of England, and identify deposit demand and supply shocks, both to individual banks and in aggregate, using microfounded sign restrictions. Based on the impulse responses, we estimate by how much banks would be required to increase their deposit rates to cover a deposit gap caused by funding shocks. Banks generally find it costly to bid up for deposits to cover a funding gap in the short run. The elasticity of household deposits with respect to the interest rate paid is typically of the order of 0.3, indicating that retail deposits are rate inelastic. But this varies across banks and the types of shock conditioned on. We also show evidence that banks are more vulnerable to deposit supply shocks than to deposit demand shocks. Historical decompositions uncover plausible shock dynamics in the historical data.

Suggested Citation

  • Ching-Wai (Jeremy) Chiu & John Hill, 2018. "The Rate Elasticity of Retail Deposits in the United Kingdom: A Macroeconomic Investigation," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 113-158, March.
  • Handle: RePEc:ijc:ijcjou:y:2018:q:1:a:3
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    Cited by:

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    2. Mpho Rapapali & Daan Steenkamp, 2020. "Developments in bank funding costs in South Africa," Working Papers 9818, South African Reserve Bank.
    3. Hoffmann, Mathias & Maslov, Egor & Sørensen, Bent E., 2022. "Small firms and domestic bank dependence in Europe's great recession," Journal of International Economics, Elsevier, vol. 137(C).
    4. Christian Keuschnigg & Michael Kogler & Johannes Matt, 2022. "Banks, Credit Reallocation, and Creative Destruction," CESifo Working Paper Series 10093, CESifo.
    5. Jack Meaning & Ben Dyson & James Barker & Emily Clayton, 2021. "Broadening Narrow Money: Monetary Policy with a Central Bank Digital Currency," International Journal of Central Banking, International Journal of Central Banking, vol. 17(2), pages 1-42, June.
    6. Jed Armstrong & Nicholas Mulligan, 2017. "Diving in the deep end of domestic deposits," Reserve Bank of New Zealand Analytical Notes series AN2017/05, Reserve Bank of New Zealand.
    7. Emilia Anuta Corovei & Adela Socol, 2019. "The Macroeconomic Drivers for Household Deposits Growth in the Eurozone," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 5(3), pages 144-151, September.

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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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