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Interest Rate Pass-Through and Consumption Response: The Deposit Channel

Author

Listed:
  • Sumit Agarwal

    (National University of Singapore)

  • Souphala Chomsisengphet

    (Office of the Comptroller of the Currency)

  • Yildiray Yildirim

    (City University of New York)

  • Jian Zhang

    (University of Hong Kong)

Abstract

This study assesses a new mechanism, the deposit channel, in the transmission of interest rate shock to household consumption using an administrative panel data set of financial transactions for Turkey. Our empirical strategy exploits variation in consumers' adherence to the Islamic laws that forbid earning interest and employs a standard difference-in-difference design. Following an unanticipated announcement of interest rate hike, rate-sensitive consumers significantly reduce their overall spending, and the response persists throughout the post-announcement period. The response of debt payment, disparate exposure to inflation, exchange rate, and the demographic difference can hardly fully account for the documented consumption response heterogeneity.

Suggested Citation

  • Sumit Agarwal & Souphala Chomsisengphet & Yildiray Yildirim & Jian Zhang, 2021. "Interest Rate Pass-Through and Consumption Response: The Deposit Channel," The Review of Economics and Statistics, MIT Press, vol. 103(5), pages 922-938, December.
    • Handle: RePEc:tpr:restat:v:103:y:2021:i:5:p:922-938
    DOI: 10.1162/rest_a_00941
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    Cited by:

    1. Sumit Agarwa & Yongheng Deng & Quanlin Gu & Jia He & Wenlan Qian & Yuan Ren, 2022. "Mortgage Debt, Hand-to-Mouth Households, and Monetary Policy Transmission [Policy intervention in debt renegotiation: evidence from the home affordable modification program]," Review of Finance, European Finance Association, vol. 26(3), pages 487-520.

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