Monetary Policy Transmission After Global Financial Crisis: Institutional Changes and Risk-Taking Behavior

This paper discusses the interactions between monetary policy, insured deposit interest rate, and deposit rate intervention. We derive sets of behavioral equations and assumptions, and modelling the interactive dynamics between those three regulators’ policy rates. The design considers several aspects: 1. The deposit interest rate equilibrium that is set on certain money market rate, compettition level in banking industry and utility maximization; 2. The process of setting the insured deposit interest rate; 3. The way of deposit interest rate capping in affecting the average deposit rate. Additionally, this paper provides model extensions and discussions that include: 1. The instantaneous effects of intervention regime changes to monetary policy transmission; 2. The effect of deposit rate capping that is set independently to monetary policy rate; 3. The effect of insured deposit interest rate setting that is fully depended to monetary policy rate; 4. Empirical estimation examples. Several key findings of this paper are as follows: 1. The deposit guarantee may either accelerates of decelerates the monetary policy transmission to deposit interest rate, depending on its sensitivity to historical deposit rate; 2. The deposit rate capping may reduce the deposit rate equilibrium, but has no effect to the deposit rate response to the monetary policy; 3. The monetary policy transmission to the deposit rate cap is first implemented, or released; 4. The result suggests that the regression of deposit rate due to the changes of monetary policy and deposit-guaranteed interest rate will suffer an endogeneity problem. Additionally, empirical estimates support the model’s prediction, and that deposit guarantee accelerates the monetary policy transmission.